UNIVERSITY  OF  CALIFORNIA 
AT  LOS  ANGELES 


■IB     Davenport  - 
pQl    The  economics 
)27    of  enterprise. 


HB 

601 

D27 


THE   ECONOMICS   OF   ENTERPRISE 


I-rf'' 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON    •    CHICAGO    •    DALLAS 
ATLANTA  •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


THE 

ECONOMICS  OF  ENTERPRISE 


4«**Eh,;:r- 


BY 

HERBERT  JOSEPH  DAVENPORT 

PROFESSOR    OF    ECONOMICS    IN    THE    UNIVERSITY    OF    MISSOURI 


"Ntia  gorit 
THE   MACMILLAN   COMPANY 

1918 

All  rights  reserved 


COPTBIQHT,   1918, 

By  the  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.    Published  November,  1913.     Reprinted 
January,  1916. 


Koiisaoli  ^TttB 

J.  8.  Gushing  Co.  —  Berwick  <fe  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


PREFACE 

In  questions  of  economic  theory  the  writer  conceives 
himself,  as  among  his  colleagues  of  the  craft,  to  be  in  essen- 
tials rather  a  conservative  than  an  innovator.  The  Socialists, 
indeed  —  with  whom  he  disclaims  all  theoretical  sympathies 
—  seem  to  him  to  be  the  ultra-conservatives  in  doctrinal 
positions.  Mostly,  therefore,  his  attack  upon  the  moderns 
is  for  the  violence  done  by  them  to  the  older  doctrine,  either 
in  the  bad  choice  of  the  portions  to  be  emphasized,  or  through 
attempted  additions  which  in  general  have  brought  no  gain 
and  have  often  imposed  serious  loss.  In  his  own  sort,  doubt- 
less, he  similarly  aspires  to  reformulate  or  to  extend  or  to 
reconstruct  the  established  principles  and  categories,  but 
this  rarely  or  never  with  the  purpose  to  abandon  them  or 
to  put  in  issue  or  to  place  in  hazard  their  central  and  intrinsic 
truths.  As  between  a  reactionary  loyalty  to  the  old,  and 
an  innovating  zeal  which  reforms  only  in  essentials  to  de- 
stroy, he  would  choose  a  middle  course  —  to  prune  in  order 
to  save,  to  engraft  only  to  complete,  to  restate  only  in  fun- 
damentals to  reaffirm.  It  is,  then,  especially  with  his  fellow 
workers  who  see  nothing  good  or  enduring  in  the  work  of  the 
masters,  who  condemn  both  superstructure  and  foundation, 
whose  hope  rests  solely  in  building  entirely  anew,  that  he 
finds  himself  entirely  out  of  sympathy.  One  should  alto- 
gether despair  of  what  the  future  may  achieve  who  is  com- 
pelled to  condemn  all  that  the  past  has  done.  That  our 
predecessors  saw  imperfectly  was  unavoidable ;  but  that 
they  did  not  see  at  all  is  incredible.  There  were  great  men 
in  those  days  —  albeit  fallible  men  —  in  close  and  intimate 
grip  with  the  facts.  Mostly  in  what  they  did  not  do,  rather 
than  in  what  they  did,  consisted  their  imperfections.  To 
fulfill  the  prophecies  rather  than  to  destroy,  to  supplement 
the  half-truths,  to  limit  too-inclusive  formulas,  to  articulate 


-^S^/l 


vi  PREFACE 

the  disconnected  generalizations,  to  find  the  synthesis  which 
shall  harmonize  the  superficial  contradictions,  —  in  this  way 
progress  lies.  It  is,  then,  upon  issues  as  to  the  degree  and 
the  direction  in  which  the  later  thought  has  proceeded  that 
mostly  the  present  writer  contests  the  views  of  his  fellows. 
As  against  most  of  these  he  claims  for  himself  the  position 
of  conservative. 

It  is,  therefore,  only  upon  the  applications  of  economic 
science  to  the  problems  of  practical  progress  that  he  is  to 
be  taken  as  a  radical  economist  or  as  qualified  to  apply  for 
membership  among  those  thinkers  who  are  facing  toward 
the  new  day  —  the  disturbers  at  large  of  the  peace.  Had  it 
been  within  the  reach  of  his  power,  this  book  should  have 
set  forth  the  economics  of  a  new  political  and  social  program  ; 
as  it  is,  the  work  expresses  only  an  aspiration.  Chief,  how- 
ever, among  the  monopolies  that  he  would  condemn  is  the 
monopoly,  so  far  enjoyed  by  the  reactionaries,  of  all  author- 
itative economic  doctrine. 

H.  J.  DAVENPORT. 

UNrVERSITT    OF    MISSOURI, 

October,  1913. 


ANALYTICAL   TABLE   OF   CONTENTS 

CHAPTER  I 

PAGKS 

Fundamental  Conditions  :  Man  and  Environment       .      1-18 

Income  (product)  comes  from  men  and  their  possessions,  and 
consists  of  goods,  1;  and  is  limited  by  consumption,  2;  not  de- 
rived from  standard  of  living  nor  determined  by  desires,  3 ;  nor 
by  volume  of  money,  4;  inevitably  twofold  in  origin  —  men  and 
environment,  5 ;  difference  of  environments  in  effect  on  income, 
6;  differences  in  men— in  strength  and  industriousness,  7;  in 
knovs'ledge,  8;  in  morality,  8;  in  institutions,  9;  interactions  be- 
tween men  and  environment,  11 ;  take  place  mostly  in  the  human 
factor,  18:  in  any  case  are  mostly  due  to  intelligence,  13-14;  but 
are  confined  within  narrow  limits,  15;  conditions  determining 
relative  supplies  of  goods,  17 ;  summary,  18. 

CHAPTER  n 

Competitive  Economics  ;   The  Regime  of  Price       .        .     19-27 

Institutions  change,  19 ;  competition  a  present  institution,  20 ; 
its  characteristic  traits,  20;  price  its  central  characteristic,  21; 
pervasiveness  of  price,  22 ;  criteria  of  definitions,  25 ;  economics 
defined,  26;  summary,  26. 

CHAPTER  IH 

The  Regime  of  Price  (Continued) 28-32 

Price  the  pivotal  point  in  all  economic  competitions,  28;  and  in 
distribution,  28-29;  but  only  so  in  the  competitive  order,  29;  the 
classifications  and  generalizations  of  which  must  conform  to  the 
nature  of  this  order,  29;  but  must  avoid  appraisals,  29-30 ;  or  any 
assumption  of  permanency  or  merit  in  the  facts  treated,  30; 
human  desires  common  to  all  economic  systems,  31 ;  summary,  31. 

CHAPTER  IV 

Specialization  and  Trade  Related  to  Money       .        .    33-41 

Specialization  imposes  interdependence  and  promotes  efficiency, 
33;  isolation  and  independence  imposing  inefficiency  for  the  indi- 

vii 


viii  ANALYTICAL  TABLE  OF  CONTENTS 

PAOES 

vidual,  34-36:  and  for  nations,  36;  specialization  possible  in  the 
competitive  order  only  through  trade,  and  trade  practicable  only 
through  intermediates,  37  ;  barter  itself  connoting  multiplicity  of 
media,  IW;  not  goods  but  money  competitive  demand  for  goods, 
39;  value  being  mostly  restricted  to  the  price  form,  39;  sum- 
mary, 40. 

CHAPTER  V 

The  Adjustment  of  Price 42-56 

The  view  of  the  outsider,  42;  of  the  insider,  43;  of  the  econo- 
mist, 44;  unreserved  supply  against  one  demand,  45;  against 
several,  46;  supply  with  reservation  prices,  47;  graphs,  48; 
reservation  prices  as  holders'  demands,  50-51 ;  goods  demands 
for  money,  51;  utility  related  to  demand,  51;  logic  of  the  mar- 
ginal analysis,  53;  price  fixed  not  by  averages,  or  by  demand 
solely,  or  supply  solely,  or  by  margins,  or  by  marginal  pairs,  54 ; 
summary,  54. 

CHAPTER  VI 

Supply  Determined  by  Cost  of  Production    .        .        .     57-84 

Price  affects  purchases,  57;  supply  affects  price,  57;  costs  of  , 
production  affect  supplies  relatively  to  one  another,  as  an  expres- 
sion of  specialization  of  production,  58;  supplies  dependent  upon 
choice  of  sacrifice  —  sacrifice  being  expressed  as  cost,  59;  alterna- 
tive opportunities  costs,  60;  what  sacrifice  cost  includes,  61; 
opportunity  cost  the  leading  coUectivist  category,  62;  as  also  a 
competitive  cost,  63;  cost  as  reservation  price,  64;  supply  limited 
at  marginal  cost,  64;  the  marginal  analysis,  64;  marginal  cost  in 
relation  to  opportunity,  65;  various  cost  bases,  67;  one's  own 
possessions  and  cost,  67 ;  a  typical  cost  account,  68 ;  cost  a  for- 
ward-looking computation  based  on  past  experience  and  affecting 
future  product,  69;  includes  all  resistances  under  the  price  de- 
nominator, 70 ;  cost  and  supply  vs.  demand,  71 ;  cost  as  expressing 
resisting  demands,  72;  the  focusing  point  of  many  influences 
bearing  upon  the  entrepreneur,  74;  which  the  economist  must 
investigate,  rather  than  the  entrepreneur,  75-76;  marginality 
personal  rather  than  instrumental,  77-81 ;  the  marginal  enterprise, 
78;  marginal  discomfort,  79;  other  margin-determining  influ- 
ences, 80 ;  the  limited  significance  of  marginality,  82 ;  pains  and 
their  significance,  82 ;  summary,  83. 

CHAPTER  VII 

Utility;  Demand;  Demand  with  Supply      .        .        .       85-105 
Price    everywhere    determined    by  demand    and    supply  and 
changed  by  changes  in  either  or  both,  85;  no  demand  without 


ANALYTICAL  TABLE  OF  CONTENTS  ix 

PAGES 

utility,  85 ;  which  is  desiredness  —  changing  as  desires  change,  86 ; 
a  relation  to  a  human  being  and  in  this  sense  solely  a  quality,  87; 
no  demand  without  marginal  utility,  88;  marginal  utility  dis- 
cussed, 89-91;  therefore  no  demand  without  scarcity,  91;  not 
marginal  utility  alone  but  a  comparison  of  marginal  utilities,  sub- 
jective valuation,  gives  demand,  91-93;  a  marginal  demand  indi- 
cating an  equality  ratio  between  alternative  marginal  utilities, 
93;  neither  marginal  demand  nor  marginal  price  fixes  price,  nor 
both  together,  94;  all  items,  marginal  and  other,  participating, 
95;  intramarginal  higgling,  96;  all  utility,  marginal  and  other,  / 
purely  individual  —  social  utility  irrelevant,  97;  utility,  marginal 
utility,  and  comparison  necessary  to  explain  demand,  97-102; 
neither  of  which  excludes  impulse  or  habit,  or  instinct,  98-99; 
or  involves  a  hedonistic  theory  of  desire,  or  any  necessary  rela- 
tion to  pleasure  and  pain,  99;  or  even  always  deliberation  and 
calculation,  100;  the  nature  and  limits  of  abstraction  and  gener- 
alization, 100-102 ;  summaries,  103,  104. 

CHAPTER  VIII 

The  Significance  of  Cost  of  Production   .        .        .      106-119 

Entrepreneur  cost  not  ultimate,  106:  but  finds  no  explanation 
in  pain ;  unexplained,  leads  to  superficial  and  circuitous  analysis, 
107-108;  still  inevitable  and  important,  being  actual,  109;  and 
pivotal,  110;  causal  sequence  on  the  cost  side,  the  supply  side, 
111 ;  all  explanations  which  are  not  genetic  imply  a  preceding 
and  conditioning  price  situation,  113;  and  a  moving  equilibrium, 
113-114;  a  necessary  method  of  analysis,  115;  the  interrelation  of 
bases  of  cost,  110 ;  summary,  116. 

CHAPTER  IX 

What  is  Production  ?  What  Things  are  Productive  ?     120-136 

Activity  and  enterprise  employing  a  variety  of  means,  120 ;  to 
a  diversity  of  ends,  material  and  immaterial,  120;  test  of  produc- 
tion net  proceeds,  price  results,  121;  not  in  materiality,  121-125; 
acoumulatability,  123;  but  in  objective  price-bearing  results,  123- 
124;  therefore  men  are  not  products,  124;  subject  matter  of 
economics  classified,  125;  ethical  criteria  inapplicable  as  test  of 
product,  126;  parasitism  and  predation  irrelevant,  127:  so  the 
question  who  consumes,  127;  the  various  sources  of  product  — 
proceeds,  128;  saloons,  gamblers,  and  thieves  productive,  130;  so 
intangible  properties,  131;  irrelevant  to  product  who  is  user,  131; 
wealth,  capital,  and  property  distinguished,  132;  rent  and  interest 
distinguished,  132:  innumerable  directions  of  investment  of  pro- 
ceeds, therefore  innumerable  varieties  of  costs,  133 ;  summary,  134. 


ANALYTICAL  TABLE  OF  CONTENTS 


CHAPTER  X 

PAGES 

The  Distributive  Process  :   Apportionment  of  Pro- 
ceeds     ..........      137-158 

Distribution  according  to  the  productivity  theory,  137;  a  price 
process,  138;  relates  only  to  primary  distribution,  i;58 ;  which  is 
captained  by  the  entrepreneur,  139;  theory  lacks  precision,  140; 
production  and  consumption  goods  similar  in  point  of  the  price 
process, — in  demand,  141;  in  supply,  142;  the  entrepreneur's 
standpoint  merely  indicates  the  direction  in  which  the  explana- 
tion is  to  be  sought,  143;  demand  as  distinguished  from  utility, 
144;  demand  moti%'ates  supply,  144-145;  but  reports  accurately 
neither  utility  nor  the  price  significance  to  the  entrepreneur,  145; 
hire  being  merely  market  price  of  the  efficiency,  141);  nor  accu- 
rately is  there  a  distinguishable  specific  efficiency,  146-148;  nor 
is  specific  efficiency  necessary  in  order  that  profits  and  opportu- 
nities function  as  costs,  148 ;  the  productivity  theory  only  approxi- 
mately true,  and  then  only  when  product  means  proceeds,  150-152; 
there  are  hirers'  surpluses,  151;  social  marginal  productivity, 
153;  distribution  ethically  viewed,  153;  property  and  deserving, 
154;  summary,  155. 

CHAPTER  XI 

Different  Bases  of  Cost  and  Distributive  Shares      159-177 

Cost  outlays  various  in  direction,  157;  mainly  wages,  profits, 
instrument  rents,  and  interest,  160;  including  equally  all  instru- 
ment hires,  160;  compelling  a  new  concept  of  capital,  161-162; 
and  a  new  doctrine  of  costs,  162,  164;  condemning  traditional 
tests  of  labor  origin,  163,  165,  167;  of  materiality,  165;  of  mo- 
bility, 168;  of  technological  functions,  168;  of  elasticity  of  sup- 
ply, 169;  of  political  or  social  significance,  171;  of  relations  to 
diminishing  returns,  171;  what  capital  is,  172,  175;  proved  by  in- 
come in  time,  or  by  discount,  or  by  interest,  173;  the  importance 
of  the  issue,  175;  summary,  176. 


CHAPTER  XII 

Land  :   Rent  and  Instruments  as  Cost  :   Land  Rent 

and  Cost 178-195 

Substitution  possible  between  factors,  179 ;  this  not  inconsistent 
with  complementarity,  179;  no  warrant  therein  for  the  threefold 
classification  of  factors,  179 ;  limitation  on  substitutions  in  agri- 
culture, is  spatial,  179;  else  no  land  shortage  possible,  179;  nor 
higher  rents  and  prices  with  increasing  population,  180;  effect  of 


ANALYTICAL  TABLE  OF  CONTENTS  xi 


land  shortage  ou  wages,  180;  extensive  aud  intensive  cultivation 
as  related  to  rent,  181;  to  prices  and  wages,  182;  to  hires  and 
instrument  costs,  183;  Ricardian  doctrine  of  rent  stated,  181-183; 
developed  and  examined,  18;?-188;  rent  as  cost,  186-187:  the  post- 
Ricardian  disciples,  186;  various  differentials  related  to  cost,  188- 
189;  fundamental  determinatits  of  rent,  UtO;  costs  as  distributive 
shares,  190;  cost  purely  an  entrepreneur  computation,  191;  the 
entrepreneur  uninterested  in  ultimate  determinants,  192 ;  various 
costs  indistinguishable  relative  to  price  determination,  193;  sum- 
mary, 193. 

CHAPTER  XIII 

Urban  Rents,  Agricultuual  Rents,  and  Costs         .     196-208 

With  urban  rents  not  fertility  but  only  position  important,  196; 
nature  of  advantages,  197 ;  rents  affected  by  demand  for  products, 
and  by  changes  in  technique  irrespective  of  owners'  deserts,  198; 
social  aspects  of  proportions  of  factors,  198-199;  developing  tech- 
nique in  transportation  and  manufacturing  tends  to  increase 
urban  as  against  rural  rents,  200-202 ;  effect  of  urban  transporta- 
tion on  distribution  of  urban  rents,  203;  urban  rents  related  to 
costs,  and  to  price,  204-207 ;  fundamental  causes  of  rents,  207. 


CHAPTER  XIV 

Capitalization  vs.  Cost  as  Determinant  op  Price    .     209-218 

Different  goods  affording  incomes  present  and  future,  209; 
present  price  related  to  future  income,  210;  through  capitaliza- 
tion, 210;  but  not  so  with  free  men,  211;  capitalization  vs.  cost 
as  determinant  of  price,  211-216;  with  durable  consumption 
goods,  212;  with  durable  production  goods,  213;  effects  of 
changed  proportions  of  factors,  215-216;  summary,  217. 

CHAPTER  XV 

Capitalization   the  Procp:ss  by  which  Future  In- 
comes achieve  Present  Worth       ....     219-235 

Future  services,  219 ;  the  effects  of  time  perspective,  219-220 ; 
doubtful  as  bearing  upon  mere  consumable  goods,  220;  but  clear 
with  money  or  with  goods  under  money  price,  221;  as  with  a 
series  of  money  incomes,  222-223;  or  with  future  incomes  with 
indefinite  money  size,  224 ;  the  commonly  accepted  view  insuffi- 
ciently individualized,  225;  any  view  prone  to  overrationaliza- 
tion,  227-232;  present  things  commanding  future  services  have 
present  utility,  229;  summary,  232. 


Hi  ANALYTICAL  TABLE  OF  CONTENTS 


CHAPTER  XVI 

PAGSa 

The  Discharge  of  Debts  :   Deferred  Payments         .     236-253 

Each  jn'od  has  many  values  —  each  value  an  exchange  ratio  be- 
tween terms  specitic  and  quantitative,  2.'5();  barter  implies  value 
but  no  price — money  exchanges  only  price,  with  all  value  rela- 
tions mere  deductions,  2:5(5;  exchange  dependent  on  specialized 
production,  '237;  the  money  economj',  237;  a  standard  inevitable 
in  deferred  payments,  238;  no  equality  in  value  since  value  is  not 
quantitative,  239-242;  but  is  only  a  ratio  which  is  actual  only  as 
price,  240;  this  true  over  intervals  of  space,  242;  of  time,  242; 
and  equally  in  present  exchanges,  242;  money  has  not  one  but 
innumerable  values,  242;  no  value  is  measurable,  measurement 
being  quantitative  and  values  not,  243;  meaning  of  instability, 
244-2,50;  injustice  of,  245;  evils  of  speculativeness,  245;  deferred 
payment  merely  one  case  of  exchange,  24(5;  test  of  stability  is 
utility,  the  things  traded  being  not  values  but  goods,  247;  the  de- 
sideratum is  indemnity,  248 ;  in  terras  of  immediate  consumption 
goods  rather  than  of  durable  goods,  249-251 ;  summary,  251. 

CHAPTER  XVII 

Money,  Credit,  and  Banking 254-331 

Currency  the  intermediate  in  exchanges,  254 ;  all  functions  are 
aspects  of  intermediateship,  —  standard,  storehouse,  payment, 
255;  money  defined,  25(5-258;  necessary  qualities,  259;  banking 
and  the  issue  of  credit,  260;  reserves  and  their  function,  260-262; 
economy  of  money,  262;  banking  viewed  separately  and  in  the 
aggregate,  2(33 ;  what  banking  really  does,  263 ;  deposits  and 
solvency,  264;  creative  of  loan  funds,  264;  cost  of  currency  from 
banks  and  from  mines,  265-267 ;  analysis  of  costs  in  the  issue  of 
credit,  265-266;  the  demand  for  media,  267-269;  traders'  sur- 
pluses, 267;  the  allocation  of  these,  267-269;  the  sellers'  the 
greater,  268;  volume  of  currency  and  prices,  269-278;  the  value 
of  gold  in  relation  to  demand,  270;  commodity  uses  as  demands, 
271 ;  monetary  theory  peculiar,  271 ;  elasticity  of  demand,  271- 
273;  all  prices  affected  equally  by  changed  volume,  273;  prices 
affect  one  another  and  tend  to  move  together,  274 ;  relation  of 
supply  of  gold  to  its  utility,  275;  supply  of  banking  media  related 
to  prices,  276;  discount  rates  and  prices,  276,  278;  Gresham's 
Law:  international  trade,  278;  currency  expansions,  interna- 
tional trade,  intercommunity  trade,  9"9;  commercial  crises,  280- 
285;  preceding  conditions,  280;  rising  prices,  282;  the  reaction, 
282:  benefits  and  dangers  of  credit,  283:  ameliorations,  284-286; 
disorganized  banking  vs.  unified  reserves,  28()-'2S7 ;  responsibility 
<or  panics,  287 ;  double  counting  of  reserves  dangerous  but  not 


ANALYTICAL  TABLE  OF  CONTENTS  xiii 

PASES 

most  serious  danger,  289;  contraction  through  scramble  for  re- 
serves, 28!)-291 ;  is  all  credit  therefore  contracting  ?  291-294 ; 
effects  on  production,  293 ;  the  remedy,  294-295 ;  post-panic  de- 
pressions, 295-306 ;  effects  of  rising  prices  on  dividends  and  credit, 
295 ;  cause  and  effect  of  narrowing  margins,  297 ;  the  delay  in  re- 
covery, 298;  restricted  consumption  and  overproduction,  300-302; 
hoarding  of  money  and  credit,  302-303 ;  investment  with  restricted 
saving,  304-305;  savings,  luxury,  charity,  waste,  306-310;  quan- 
tity theory  of  money,  310-321 ;  admitting  that  not  goods  but  only 
goods  at  a  price  are  demand  for  money,  311-312;  and  that  not 
goods  as  an  aggregate  but  only  goods  separately  exchange  against 
money,  312-314 ;  nothing  follows  adverse  to  the  quantity  theory, 
314—316;  quantity  of  currency  rather  than  money  important,  316- 
317 ;  credit  retains  a  fixed  ratio  to  money,  317 ;  the  phenomena  of 
banking  in  relation  to  the  quantity  theory,  318 ;  and  the  phenom- 
ena of  depressions,  319;  changed  demand  and  reservation  prices, 
319-321;  bimetallism,  321-331;  effects  of  demonetization,  321; 
compensatory  action  and  its  effects,  321-324 ;  national  and  inter- 
national, 324-327;  advantages  of  international  bimetallism  con- 
jectural and  unimportant,  327-330  ;  what  fluctuations  are 
important,  327 ;   and  what  the  proper  base-lines,  328. 


CHAPTER   XVIII 

Loan  Fund  Capital 332-354 

Interest  determined  as  price  adjustment,  332;  social  capital, 
333;  money  as  capital,  334;  whether  credit  is  capital,  334;  what 
private  capital  includes,  335 ;  collectivist  capital,  336;  method  of 
increase  of  private  capital,  337;  saving  and  lending,  337;  private 
capital  divergent  from  social  capital,  337-342 ;  borrowed  thing, 
repaid  thing,  premium  thing,  all  currency,  342-347 ;  the  loan  fund 
widely  and  authoritatively  recognized,  344-347;  loan  and  rental 
contracts  distinguished,  346;  loan  fund  derived  from  saving  and 
from  banking,  347-349;  effects  of  banking  on  interest,  349-352; 
banking  essentially  underwriting,  351 ;  discount  rates  analyzed, 
361 ;  summary,  352. 

CHAPTER  XIX 

The  Loan  Rate:  Interest 355-397 

Income  a  currency  flow,  355;  loans  a  method  of  modification, 
356 ;  interest  the  payment  to  achieve  this,  356 ;  loan  fund  fur- 
nished by  saving  and  by  banking,  356-357  ;  much  capital  is  origi- 
nal bounty,  358;  saving  never  painful,  359,  362;  interest  rates 
not  nece.'-sary  to  saving,  361;  abstinence,  rightly  interpreted,  a 
truism,  362;   influences  to  modify  individual's  saving,  3fi4-366; 


3dv  ANALYTICAL  TABLE  OF  CONTENTS 

PA0B9 

saving  and  banking  as  sources  of  loan  fund,  30(5:  different  absti- 
nence theories,  3(J7-376;  laud  and  capital  in  interest  theory,  as 
per  Bullock,  Hadley,  Senior,  and  Taussig,  373-375;  prodiu-tivity 
in  time  gives  interest,  376;  gains  from  investment  give  inter- 
est, 377;  so  also  durable  sources  of  service,  377;  rents  related  to 
interest,  378;  renters'  surpluses  and  interest,  370;  no  implication 
of  social  service,  380;  various  independent  causes,  each  adequate, 
381 ;  the  process  of  fixation  a  price  process,  382 :  reservation  prices 
in  interest  theory,  383 ;  the  concept  of  a  market,  383-385 ;  interest 
not  an  adjustment  of  pleasures  against  pains,  385;  social  explana- 
tions and  the  social  organism,  387-303;  method  of  hypothesis,  390; 
the  social  cosmos,  391-393;  summary,  388. 

CHAPTER  XX 

Risk,  Profit,  and  Interest 398-406 

Risks,  insurable  and  non-insurable,  as  costs,  309-401 ;  advan- 
tages of  affiliations,  300-401 :  risk  costs  greater  as  competitor  is 
weaker,  309,  400 ;  risk  as  limit  on  size,  400 ;  risk  as  related  to 
profit  and  interest,  401^03 ;  profits  and  social  welfare.  405 ;  specu- 
lation, gambling,  and  underwriting,  404 ;  summary,  405. 

CHAPTER   XXI 

Capitalization  and  Discount  Rates     ....     407-412 

Re'sume  of  previous  conclusions,  407-400;  not  one  but  many 
interest  rates,  410;  these  related  to  the  capitalization  process, 
410;  capitalization  doctrine  circuitous  unless  individualized,  411. 

CHAPTER  XXII 

Classification  of  the  Factors  of  Production  .     413-422 

Scope  of  the  objects  of  cost  outlays,  413;  traditional  view  of 
these,  414;  land  vs.  capital,  414;  traditional  view  collective  and 
genetic,  415;  also  technological  but  inaccurate,  416 ;  many  kinds 
and  degrees  of  factors,  417;  interrelations  and  interactions  num- 
berless, 419;  interdependence  and  substitution,  420;  traditional 
classification  indicted,  421 ;  summary,  421. 

CHAPTER   XXIII 

Laws  of  Return  :   Profitable  Proportions  :    Profitable 

Size 423-445 

Industrial  facts  underlying  the  law  of  proportions,  423 ;  social- 
static  formulation,  424,  425;   social-dynamic,   425;  competitive- 


ANALYTICAL  TABLE  OF  CONTENTS  xv 

PAOK8 

static,  426;  differences  in  entrepreneurs,  427;  classification  of 
factors  irrelevant,  428;  a  price  calculation,  despite  various  au- 
thorities, 429;  deductions,  430;  more  than  a  land  law,  431;  or 
than  technological  law,  431 ;  competitive-dynamic  formulation, 
433;  deductions,  434;  distributive  applications,  435;  general  ap- 
plications, 437;  advantage  in  size,  437^43;  size  vs.  proportions, 
438,  441 ;  applies  to  industries  in  competition  with  one  another, 
441 ;  long-time  and  short-time  best  size,  442 ;  law  illustrated  in 
what  industries,  442 ;  the  applications,  442;  summary,  443. 

CHAPTER  XXIV 

Distribution  and  the  Law  op  Proportions        .        .     446-458 

Costs  mainly  distributive  shares,  446;  traditional  exaggeration 
of  technology,  446;  some  factors  technological,  others  not,  447; 
interdependence  and  substitutions,  448;  distribution  favors  the 
relatively  scarce,  448;  complementary  factors,  449;  relation  of 
population  to  wages,  450;  confusions  of  static  with  dynamic,  450; 
wages  and  standard  of  living,  451 ;  changes  in  factors  require 
new  distributive  analysis,  452;  effects  of  changed  industrial  tech- 
nique, 454;  especially  in  agriculture  on  land  rent,  455;  elasticity 
of  consumption  related  to  laud  rent,  455-458;  Gregory  King's 
law,  456. 

CHAPTER  XXV 

Costs  in  Corporate  and  Large  Businesses  .  .  459-473 
Profits  in  the  large  organizations,  459;  related  to  interest,  divi- 
dends, and  risks,  460;  stockholders'  operations  in  corporate 
stocks,  461;  managers'  operations  for  private  gain,  461;  business 
code  of  ethics,  461;  cost  related  to  monopoly  supply,  463;  giant 
industry  contrasted  with  farming,  464-467 ;  temporary  cost  not 
inconsistent  with  loss,  467 ;  idle  plants,  468 ;  supply  in  average 
conditions,  469;  in  favorable  conditions,  470;  in  adverse  condi- 
tions, 471 ;  partial  applications  of  monopoly  methods,  472 ;  sum- 
mary, 473. 

CHAPTER  XXVI 

Competition  and  Monopoly 474-487 

Monopoly  and  competition  antithetical,  474-476;  yet  monopoly 
competitive  in  spirit,  476;  good  and  ill  in  competition,  476; 
laissez  faire  criticized,  477-479;  wastes  of  competition,  478;  com- 
petition often  self-destructive,  479 ;  economies  and  advantages  of 
size,  479;  monopoly  affecting  buyers'  and  sellers'  surpluses,  480; 
buyers'  and  sellers'  combination,  481 ;  monopoly  theory  and 
competitive  theory,  482;   pressure  toward  monopoly,  cut-throat 


xvi  ANALYTICAL  TABLE  OF  CONTENTS 

PAGES 

competition,  482;  unwise  lejjislation,  484;  combinations  of  combi- 
nations, 485 ;  a  degree  of  monopoly  in  all  successful  business,  486. 

CHAPTER   XXVII 

The  Social  Dividend  and  the  Individual  Income    .     488-503 

Social  dividend  the  total  of  valuable  benefits,  488 ;  distributed 
mainly  through  money  incomes,  4tl0-491 ;  products  the  primary 
fact,  490 ;  in  what  these  consist,  491-494 ;  different  sorts  of  serv- 
ices, 491 ;  service  from  durable  properties,  491,  492 ;  privilege 
and  power  as  income,  493,  494;  primary  and  secondary  distribu- 
tion, 494;  property,  especially  natural  bounty,  related  to  distri- 
bution, 495;  also  franchises  and  monopolies,  496-497;  great  wealth 
controls  high  ratio  of  gains,  497-501 ;  which  defy  accurate  division 
into  interest  and  profit,  498-501 ;  summary,  501. 

CHAPTER   XXVni 

The  Distributive  Analysis  in  the  Large  .        .        .      504—533 

Scope  of  the  chapter,  504 ;  genesis  of  current  economic  doc- 
trines, 504-515;  unproductive  labor,  505;  cameralism,  505;  mer- 
cantilism, 506;  physiocracy,  507;  later  views,  e.g.  Adam  Smith, 
J.  S.  Mill,  508,  509;  influence  of  English  legal  system,  510;  Provi- 
dence guides,  511;  natural  law  coutrols,  512;  laissez  faire,  513; 
modern  views  summarized,  514;  criticized,  515-519;  the  census  of 
wealth  in  the  United  States,  519;  criticized  for  its  concept  of 
capital,  521 ;  natural  bounty,  522 ;  wealth  and  poverty  in  the 
United  States,  523,  524;  enormous  production  and  its  explana- 
tion, 523-526;  single  tax  and  other  taxes,  527;  exploitation  by 
franchises,  monopolies,  and  private  property  in  natural  bounty, 
628 ;  the  need  of  a  new  economics,  528-538. 


THE   ECONOMICS    OF   ENTERPRISE 


THE  ECONOMICS  OF  ENTERPRISE 

CHAPTER  I 

FUNDAMENTAL    CONDITIONS:    MAN   AND   ENVIRONMENT 

What  income  is  and  whence  it  comes.  —  There  are  ob- 
viously only  two  sources  from  which,  in  the  main,  society 
as  a  whole  or  any  particular  individual  may  derive  an  in- 
come :  (1)  from  the  efforts  made,  (2)  from  the  possessions 
used.  The  only  cases  that"  fit  clumsily  into  this  statement 
are  the  unsought  bounties  of  nature  or  of  chance. 

Of  any  isolated  individual  man  or  of  an  isolated  society 
or  of  the  human  race  taken  as  a  whole,  it  may,  then,  be 
safely  asserted  that  the  current  product  of  goods  for  con- 
sumption —  the  aggregate  income  —  must  be  derived  either 
from  current  labor  or  from  the  productive  possessions  already 
acquired.  All  that  society  can  have  to-day  it  must  acquire 
to-day  or  must  take  out  of  its  past  product.  How  much 
society  can  consume,  how  great  is  its  aggregate  command  of 
the  things  that  satisfy  human  desires,  —  goods,  —  is  condi- 
tioned by  the  aggregate  social  production  —  the  social  divi- 
dend. This  aggregate  output,  this  social  dividend,  conditions 
and  determines  the  average  individual  income,  precisely  as 
any  other  dividend  conditions  its  quotient.  And  it  is  evident 
also  that  ultimately  this  individual  income  must  consist  en- 
tirely of  the  things  that  satisfy  human  needs ;  that  is,  must 
consist  in  consumption  goods,  in  those  things  that  are 
wanted  in  their  own  right  and  not  as  means  to  the  getting 
of  something  else.  We  have  here  no  concern  with  the  money 
in  terms  of  which  the  incomes  may  be  received  —  no  neces- 
sary reference,  that  is  to  say,  to  the  nominal  income  —  but 
only  to  the  ultimate  control  of  consumption  goods,  the 
things  that  are  wanted  for  their  service  to  human  beings. 

It  is  also  evident  that,  in  final  analysis,  all  incomes  are 

B  1 


2  THE  ECONOMICS  OF  ENTERPRISE 

psychic  incomes,  the  experience  of  having  wants  gratified. 
Con8umption  goods  are  ultimately  not  significant  as  the  con- 
crete objective  goods  themselves,  but  for  the  services  which 
they  render  —  precisely  as  the  vibrations  of  air  that  make 
sound  concern  each  of  us  only  as,  by  striking  on  the  eardrum, 
they  affect  the  consciousness. 

This  social  dividend — the  current  output  of  consumption 
goods  —  finds,  then,  its  sources  on  the  one  side  in  the 
human  productive  power  of  society,  its  efficiency  in  work 
(labor),  and  on  the  other  side  in  the  degree  and  kind  of 
equipment  of  society,  its  possessions  —  its  environment  of 
productive  power  and  opportunity. 

That  average  consumption  is  limited  by  average  produc- 
tion is  not  far  from  an  axiom.  None  the  less  it  needs  em- 
phasis ;  for  in  the  complexity  of  actual  affairs  it  is  easy  to 
lose  a  workmg  grasp  of  it.  We  are,  for  example,  often  told 
that  the  reason  why  the  average  income,  say  in  India,  is 
so  low  is  that  the  standard  of  living  is  so  low :  men  have 
little  because  they  desire  little,  rather  than  because  they  pro- 
duce little.  Now  it  may  well  be  that  men  produce  little  be- 
cause they  desire  little,  but  it  is  only  in  this  way  that  desires 
can  affect  the  quantum  of  product  and  thereby  the  average 
consumption.  It  is  safe  to  say  that  there  never  was  and 
never  will  be  a  race  of  men  lacking  in  desires  still  to  be 
satisfied,  although  it  may  well  be  true  that  the  dislike  of 
effort  is  one  of  the  reasons  why  some  desires  fail  of  product 
for  their  satisfaction.  But  it  still  holds  that  the  desires 
outrun  the  means  of  satisfaction.  Conceivably,  indeed,  all 
labor  might  be  pleasant ;  and  yet,  by  reason  of  the  limited 
time  for  work  and  of  the  limited  time  for  play  and  of  the 
limited  time  for  the  enjoyment  of  the  fruits  of  work,  —  a 
conflict  among  competing  desires,  —  some  desires  for  con- 
sumable goods  must  be  thwarted  of  their  fulfillment,  the 
product  being  still  inadequate  for  the  satisfaction  of  all  de- 
sires. Clearly,  then,  a  low  average  of  production  is  not  due 
to  the  fact  that  all  desires  are  satisfied. 

Do  standards  of  living  fix  wages?  —  In  the  aggregate  and 
average,  then,  men  do  not  stop  consuming  because  they  want 


FUNDAMENTAL  CONDITIONS  3 

no  more  goods  but  because  they  can  get  no  more  on  terms 
that  make  this  more  worth  while.  Thus,  in  the  assertion  that 
wages  are  high  in  America  because  the  standard  of  living  is 
high,  and  low  in  India  because  the  standard  of  living  is  low 
there,  there  is  a  sheer  reversal  of  the  causal  sequence.  A 
standard  of  living  is  merely  a  level  of  consumption  so  fixed  in 
habit  that  any  falling  short  is  felt  as  a  privation.  America 
has  a  high  standard  because  the  per  capita  production  in  j^ 
America  is  great :  people  have,  therefore,  acquired  the  habit 
of  consuming  much.  The  level  of  production  fixes  the  stand- 
ard. The  standard  is  causal  in  the  case  only  so  far  as,  in 
turn,  it  may  react  to  affect  the  volume  of  product.  Average  *^ 
income  fixes  the  standard,  rather  than  the  standard  the 
average  income.  Every  few  years  some  millions  of  people  in 
India  starve ;  not  because  they  do  not  want  food,  but  be- 
cause they  cannot  get  it.  They  are  unable  to  get  it  because 
they  are  unable  to  produce  it.  That  they  have  the  habit 
of  consuming  little  is  merely  another  way  of  saying  that 
they  have  always  a  scant  margin  of  actual  product  over 
sheer  necessity  —  a  margin  that  may  at  any  time  disappear. 

The  relation  between  desire  and  product.  —  But  nothing 
in  all  this  should  put  in  question  the  truth  that  the  fact 
fundamental  to  the  production  of  goods  is  the  desire  for 
goods.  Things  would  nowhere  have  human  effort  directed 
to  them  if  they  were  not  wanted.  Desire  lies  back  of 
product ;  human  needs  are  the  ultimate  explanation  for 
the  putting-forth  of  labor,  and,  therefore,  for  the  existence 
of  the  products  of  labor.  But  it  remains  true  that  the 
limit  upon  what  is  consumed  is  not  the  limit  of  desire  but 
the  limit  of  accomplishment.  So,  again,  to  say  that  wages 
are  low  in  India  because  work  is  scarce  holds  in  the  sense 
only  that  wages  are  low  because  that  sort  of  labor  is 
scarce  that  is  efficient  enough,  under  the  existing  con- 
ditions, to  command  higher  wages.  It  is  true  that  needs, 
in  that  climate,  are  not  as  many,  and  that  many  of 
these  are  not  as  imperative  as  in  severer  climates ;  less 
suffices  there  than  suffices  here.  But  it  remains  true  that, 
even  with  these  less  urgent  needs,  their  wearily  long  work- 


4  THE  ECONOMICS  OF   ENTERPRISE 

day  leaves  the  Eiu>t  Intlians  scant ilj'  housed  and  clothed  and 
fed.  Recurrently  famine  mows  down  its  millions  of  victims. 
So  far,  then,  from  there  being  no  work  to  do,  there  is  more 
work  acutely  needing  to  he  tlone  than  can  get  done.  The 
problem  is  greater  than  the  work  can  solve ;  the  lack  is  not 
in  the  work  to  do  but  in  the  work  done. 

Money  versus  goods.  —  Even  more  superficial  is  the  at- 
tempt to  explain  a  low  average  of  consumption  by  the  lack 
of  money.  From  the  fact  that  any  one  of  us  who  has  more 
money  can  have  more  goods  to  consume,  it  is  sometimes  de- 
duced that  if  all  of  us  had  more  money  we  could  all  of  us 
have  more  goods.  But  money  is  good  only  for  buying  things. 
The  command  of  things  to  be  consumed,  and  not  the  amount 
of  monej^  is  the  limit  upon  what  the  total  monej^  can  buy. 
Beware  of  the  fallacy  of  reasoning  from  one  to  all.  If  you 
get  hold  of  more  coupon  tickets  against  the  restaurant  you 
can  have  more  viands,  but  only  upon  terms  of  so  much 
the  less  for  others.  At  all  events,  society  as  a  whole  cannot 
be  fed  by  multiplying  coupon  tickets.  Only  product  can 
solve  that  problem.  One  tree  by  growing  faster  can  over- 
top the  others,  but  not  all  trees  by  following  this  device  can 
overtop  all  the  rest.  One  runner  may  outstrip  the  others 
by  his  swift  running,  but  all  may  as  well  stand  still  as  run 
in  an  equal  race.  Average  consumption  depends  upon  aver- 
age production  and  not  upon  the  volume  of  money  claims 
against  this  product. 

"What  money  does.  —  Average  consumption  is  a  question 
of  labor  and  of  factories,  of  herds  and  of  crops,  and  not  of 
money.  Money  is  merely  a  great  convenience  in  the  pro- 
cess of  making  exchanges.  We  sell  for  money,  but  this  is 
only  to  get  the  means  wherewith  to  buy  something  else. 
Money  simplifies  the  process.  Without  it  one  might  search 
hard  and  long  to  find  some  one  having  what  one  wanted  and 
wanting  what  one  had.  Money  is  that  one  commodity 
which  has  come  to  be  accepted  as  the  usual  intermediate  in 
trade.  Its  main  service  is  as  medium  of  exchange.  But 
people  could  get  on  without  any  one  money  commodity, 
making  their  exchanges  directly  bj'  barter,  despite  the  great 
inconveniences  of  this  method.     Doubling  the  monev  would 


FUNDAMENTAL  CONDITIONS  5 

not  double  the  products  of  the  fields  and  the  factories,  or 
the  strength  and  skill  of  human  beings.  All  these  would 
remain  as  before.  Money  is  not  the  cause  or  the  basis  or 
the  test  of  aggregate  well-being.  The  aggregate  or  average 
production  is  the  ultimate  fact  in  any  society.  Who  has 
the  money  —  the  orders  or  coupons  against  the  product  — • 
is  a  question  of  importance,  but  only  as  it  bears  on  the  dis- 
tribution of  the  goods  produced  among  the  different  members 
of  society.  Any  individual  would  like  to  have  his  own 
money  doubled,  just  as  any  one  of  us  would  like  an  increased 
number  of  orders  or  of  coupon  books  upon  the  grocer  or  the 
dry  goods  man  —  but  only  upon  the  condition  that  the 
money  or  orders  or  coupon  books  of  other  men  were  not  also 
doubled.  Increasing  the  coupon  books  would  not  increase 
the  amount  of  goods  which  the  grocer  or  dry  goods  man  has 
in  his  shop.  Thus  the  love  of  money,  or  the  evil  or  good  of 
this  love,  is  ultimately  the  love  of  the  things  that  money  con- 
trols. Money  is  purchasing  power  —  command  over  the 
things  in  life  that  are  bought  and  sold. 

Man  and  Environment  —  Effort  and  Opportunity.  —  For 
our  present  purposes,  then,  the  human  race  as  producing 
agent  in  its  relation  to  its  environment  is  the  subject  matter 
of  our  study.  Man,  as  the  first  term  in  the  relation,  is  re- 
garded as  standing  over  against  an  outside  world  of  fact 
and  circumstance,  of  which  he  makes  such  use,  and  from 
which  he  gets  such  aid  and  benefit,  as  he  can.  His  problem 
is  to  adapt  activity  to  opportunity,  to  seek  out  his  best 
adjustment  to  his  situation  and  his  best  utilization  of  it. 
He  illustrates  one  aspect  of  the  great  law  of  correspondence 
to  environment.  The  economist  must,  therefore,  study  hu- 
man productive  effort  with  constant  reference  to  the  condi- 
tions which  obtain,  now  to  further,  and  now  to  limit,  the 
resulting  product.  As  with  the  individual,  so  essentially 
with  society :  success  is  not  purely  a  question  of  pluck  and 
brain ;  something  must  be  allowed  for  surroundings  and 
opportunity.  Good  legs  and  a  fair  field  are  both  needed 
for  fast  running.  So  in  all  economic  relations,  socially  or 
individually  viewed,    both   actor   and   opportunity  require 


6       THE  ECONOMICS  OF   ENTERPRISE 

examination.  Life,  for  each  one  of  us,  is  a  question  of  what 
there  is  in  us  plus  what  is  outside  —  of  our  powers  and  ener- 
gies in  the  face  of  our  surroundings  and  opportunities.  Give 
Crusoe  his  ishmd ;  what  will  he  do  with  it  ?  This  is  in  part 
a  question  of  Crusoe  and  in  part  a  question  of  his  island. 
For  races,  likewise,  the  problem  is  on  one  side  a  matter  of 
character  and  capacity,  on  the  other,  of  surroundings  and 
opportunity. 

Why  there  is  plenty  or  dearth.  —  It  should  now  be  clear 
that  wherever  there  is  found  a  high  stage  of  civilization,  or 
great  prosperitj'',  or  a  high  average  production  and  consump- 
tion of  wealth,  the  explanation  must  always  lie  in  the  char- 
acter of  the  people  under  examination  or  in  the  character 
of  the  environment  in  which  they  live.  If  the  people  in 
China  have  less  per  capita  to  consume  than  the  people  in 
France,  it  is  because  the  Chinese  produce  less  per  capita 
than  do  the  French ;  and  the  explanation  of  this  must  be 
found  in  the  lower  vigor,  or  skill,  or  energj^,  or  intelligence, 
or  scientific  attainments,  of  the  Chinese,  or  in  the  unfavor- 
able character  of  the  opportunities  in  which  they  live.  If 
Americans  are  more  prosperous  and  live  better  than  Euro- 
peans, it  must  be  that  Americans  are  better  producers,  — 
more  active,  more  inventive,  more  enterprising,  —  or  that 
the  soil  and  climate  and  other  natural  resources  of  America 
offer  more  advantageous  opportunities  for  production.  No 
one  has  great  difficulty  in  understanding  this  principle  as 
illustrated  in  the  affairs  of  everyday  life.  Long  ago  it  was 
remarked  that  not  even  the  most  skillful  worlanan  can  make 
bricks  ■\;\dthout  straw.  Bad  tools  place  the  best  of  mechanics 
at  disadvantage.  Men  do  not  gather  grapes  of  thorns  or 
figs  of  thistles.  It  takes  more  than  a  good  farmer  alone, 
or  than  a  good  farm  alone,  to  make  a  good  crop.  There 
must  be  both  farm  and  farmer.  Only  opportunity  improved 
is  success. 

How  environments  differ.  —  The  production,  then,  of 
goods  by  man,  so  far  as  it  does  not  rest  with  the  character 
of  the  actor  himself,  must  find  its  explanation  in  the  nature 
of  his  environment,  —  in  the  elements,  in  the  varying  condi- 


FUNDAMENTAL  CONDITIONS  7 

tions  of  temperature,  rainfall,  sunshine,  humidity,  health- 
fulness,  etc. ;  in  the  soil,  or,  more  accurately,  in  the  land,  its 
fertility  and  workability,  its  mineral  resources,  its  convenience 
for  industry  and  commerce ;  in  the  varying  sum  of  natural 
forces  more  or  less  within  the  control  of  man,  such  as  winds, 
tides,  electricity,  gravitation,  and  steam.  This  enumera- 
tion is  of  necessity  both  incomplete  and  inexact.  Climate 
cannot  be  definitely  distinguished  from  winds,  electricity, 
and  light ;  nor  can  natural  forces  be  treated  apart  from  ques- 
tions of  navigation  and  convenience  for  commerce.  Light, 
which  may  be  used  as  a  natural  force  for  power  or  for  the 
purposes  of  chemistry  or  of  art,  is,  from  another  point  of 
view,  a  factor  in  the  fertility  of  the  soil.  But  it  is  important 
merely  to  hold  in  mind  that  wealth  depends  upon  the  corre- 
spondence of  two  factors,  —  (1)  man  himself,  and  (2)  the 
conditions  surrounding  him.  He  may,  as  we  shall  see 
later,  in  some  measure  modify  surrounding  conditions.  But 
it  will  still  remain  true  that  the  arctic  regions  and  the  tropi- 
cal deserts  do  not  offer  favorable  opportunities  for  his  wealth- 
producing  activities.  He  may  make  for  himself  artificial 
lines  of  communication ;  but  rivers,  lakes,  and  seas  will 
retain  an  economic  importance  for  this  purpose.  He  may 
exist  making  small  use  of  the  opportunities  offered  by  natural 
forces ;  but  it  will  remain  true  that  in  these  rest  the  possi- 
bility of  the  greatest  efficiency  and  the  largest  field  for 
economic  progress. 

How  the  human  factor  differs.  —  Turning  now  especially 
to  an  examination  of  the  human  factor  in  production,  we 
note  that,  while  the  producing  powers  of  men  are,  in  appre- 
ciable degree,  a  matter  of  physical  strength  and  endurance, 
a  larger  measure  of  importance  should  be  ascribed  to  agility 
and  to  concentration  of  effort.  On  this  point,  the  German 
economist,  Wilhelm  Roscher,  writes : 

"According  to  the  reports  of  English  manufacturers,  an  Eng- 
lish workman  produces  on  an  average  almost  twice  as  much  as  a 
Frenchman ;  the  latter  in  turn  more  than  an  Irishman.  An  Eng- 
lish wage  earner  who  had  worked  in  a  French  factory,  speaking 
before   the   Parliamentary  Committee,   gave  his  opinion  of   the 


8  THE  ECONOMICS  OF  ENTERPRISE 

French  as  follows :  '  It  cannot  be  called  work  they  do ;  it  is  only 
looking  at  it  and  wishing  it  done.  Thus,  for  example,  a  good 
Englisli  spinner  with  an  eight-hundred-spindle  machine  could  pro- 
duce daily  sixty-six  pounds  of  yarn  ;  a  Frenchman  onl,y  forty-eight 
pounds.  .  .  .'  The  report  of  an  Agricultural-interest  Commission 
places  the  North  American  workman  above  the  English  in  good 
conduct,  fidelity,  and  interest.  A  Berlin  woodcutter  accomplishes 
as  much  in  ten  days  as  an  East  Prussian  in  twenty-seven  days. 
(Hoffman.)  English  planters  on  the  Hellespont  prefer  to  pay  Greek 
laborers  ten  pounds  sterling  a  year  and  their  keep  rather  than  Turk- 
ish laborers  three  pounds.  So  the  Malay  field  laborer  gets  two  and 
a  half  dollars  per  month,  the  Malabar  four,  the  Chinese  six." 

Probably  equally  important  in  production  are  the  dis- 
tinctively moral  qualities  of  men,  and  the  social  and  moral 
conditions  in  which  they  live  and  for  which  they  are  largely 
responsible.  Under  modern  conditions  every  corner  of  the 
world  does  business  with  almost  every  other.  Business 
affairs  are  complex,  of  enormous  magnitude,  and  highly 
centralized.  Great  factories,  employing  thousands  of  men, 
sell  goods  all  over  the  world.  The  force  of  officers,  clerks, 
and  agents  is  necessarily  large.  The  system  of  buying  and 
selling  on  credit  is  widespread.  Business  must  therefore 
be  largely  done  on  terms  of  trust  and  confidence.  A  certain 
degree  of  honesty  and  good  faith  is  essential  to  the  success 
of  this  system,  and  any  society  lacking  in  this  respect  must 
suffer  thereby.  These  qualities  are  especially  important 
under  present  conditions  because  most  men  must  be  wage 
earners  serving  under  employers.  The  productive  effective- 
ness of  society  must  therefore  largely  depend  upon  the  good 
faith  of  the  employees. 

Again :  in  no  society  in  which  people  lack  in  forethought 
for  the  future  will  work  go  on,  unless  under  stress  of  immedi- 
ate need.  The  ability  to  wait,  to  see  ahead,  and  to  provide  for 
the  far-off  want,  drains  the  land,  clears  the  forests,  plans  the 
machinery,  constructs  the  railroads,  and  builds  the  factories. 

How  intelligence  affects  product.  —  But  most  important 
among  the  characteristics  of  man  as  producer  are  his  intel- 
lectual powers  and  acquirements.  If  we  compare  modern 
industrial  processes  with  the  methods  of  ancient  times,  we 


FUNDAMENTAL  CONDITIONS  9 

get  some  notion  of  the  importance  of  science  and  art  in  pro- 
duction. Especially  in  the  world  of  economics  is  it  true 
that  knowledge  is  power.  The  savage  made  an  enormous 
step  forward  when  he  acquired  the  knowledge  of  the  bow 
and  the  rod.  Tools  increase  by  many  fold  the  effectiveness 
of  human  energies.  But  when,  by  the  use  of  machinery, 
man  has  harnessed  to  his  aid  the  forces  of  nature,  the 
field  of  progress  is  indefinitely  widened.  By  spindle  and 
loom  he  multiplies  his  product  by  hundreds.  Steam  and 
electricity,  the  printing  press,  the  cotton  gin,  and  the 
countless  contrivances  which  make  of  every  county  fair 
a  collection  of  marvels,  and  of  every  world's  exposition 
a  display  of  miracles  —  these  are  the  fruits  of  that  civiliza- 
tion into  which  each  one  of  us  is  born  as  to  a  free  heritage. 
And  remember  that  behind  the  art  and  the  skill  in  all  these 
processes  and  methods,  there  is  a  world  of  pure  science. 
No  one  has  grown  more  grain  than  the  chemist.  The  diffi- 
cult problems  of  industry  are  wrought  out  in  the  laboratory 
of  the  specialist.  The  investigators  and  inventors  have 
revolutionized  the  methods  and  the  organization  of  the 
modern  world.  The  ruling  forces  of  civilized  life  are  the 
intellectual  forces.  The  moral  code  of  eighteen  hundred 
years  ago  left,  indeed,  not  much  to  be  added.  Laws,  gov- 
ernments, institutions,  science,  art,  invention,  and  dis- 
covery, —  these  are  the  facts  which  measure  the  distance 
between  civilization  and  savagery.  In  these  directions  the 
progress  of  mankind  is  seemingly  without  limit. 

How  social  conditions  affect  product.  —  The  effect  of  the 
social  situation  upon  the  productive  power  of  the  laborer 
m.ay  be  great.  The  bearing  of  science  and  invention  needs 
perhaps  no  further  emphasis.  Important,  likewise,  and 
sometimes  in  an  equal  degree,  are  the  safety  and  security 
of  the  individual  and  of  his  property,  —  his  freedom  of 
choice,  his  immunity  from  different  forms  of  injustice  and 
exploitation.  No  society  which,  through  disorder,  crime, 
war,  or  overtaxation,  unsettles  the  connection  between 
industry  and  reward,  can  fail  of  enfeebling  its  productive 
forces.  Security  of  life,  property,  and  investment  is  essen- 
tial to  high  economic  efficiency. 


10  THE  ECONOMICS  OF  ENTERPRISE 

So  likewise,  while  the  institution  of  slavery  maj'  doubtless 
sometimes  afford  the  most  effective  organization  of  labor, 
it  is  safe  to  say  that  no  advanced  society  can  reach  its  high- 
est possibilities  in  production,  if  men  are  not  free  to  work 
for  their  own  benefit  and,  if  they  so  desire,  under  th(^ir  own 
direction.  Labor  must  be  voluntary,  and  it  must  be  assured 
of  its  reward,  or  it  will  not  be  vigorous  and  caretaking. 
It  is  certain  that  the  wage  of  the  coolie  laborer  of  India  — 
his  real  wage,  his  command  of  goods  achieved  through  his 
labor  —  would  be  higher  were  he  not  taxed  and  tithed  and 
rack-rented  and  plundered  and  exploited  for  the  gain  of  all 
sorts  of  parasitic  livers  and  wasters.  Not  only,  then,  do 
the  toll-takers  out  of  the  products  of  others  —  the  cuckoos 
and  cow  birds,  the  parasites,  and  the  barnacles  —  redis- 
tribute the  consumable  goods  produced  in  society,  but  also, 
by  disturbing  the  relation  between  effort  and  the  reward 
of  effort,  they  may  in  serious  measure  reduce  the  produc- 
tive effectiveness  of  such  labor  as  is  done.  Both  slavery  and 
feudalism  suffered  by  this  defect.  Parasitism  weakens  the 
springs  of  motives  for  its  victims  and,  at  the  same  time,  re- 
laxes the  productive  powers  of  those  who  wrongfully  profit 
from  it. 

But  we  are  now  concerned  with  the  distribution  of  the 
social  product  only  in  the  degree  that  the  terms  of  the  dis- 
tribution react  upon  production.  The  present  question 
is  the  amount  produced  and  not  the  terms  of  its  division 

—  the  aggregate  sum  to  be  distributed  rather  than  the  de- 
termination and  the  apportionment  of  the  individual  shares 

—  and  we  are  logically  held  to  this  course  since  what  is 
distributed  depends  upon  what  is  produced.  Before  there 
can  be  distribution  there  must  be  production.  We  must 
first  see  our  problem  not  in  detail  but  in  its  large  and  general 
and  aggregate  aspects.  An  analysis  of  the  distributive  process, 
the  forces  and  methods  by  which  the  shares,  or  fractions,  of  the 
aggregate  product  are  apportioned  —  the  most  difficult  prob- 
lem, or  series  of  problems,  in  the  field  of  economic  theory  — 
must  await  its  later  turn. 

But  it  is  none  the  less  true  that,  in  the  larger  study  of  the 
social  income  as  the  joint  product  of  human  labor  in  coopera- 


FUNDAMENTAL  CONDITIONS  11 

tion  with  productive  equipment,  the  institutional  situation 
is  very  important.  Institutions,  however,  are  a  working 
consensus  of  human  thought  or  habit,  a  generally  established 
attitude  of  mind  and  a  generally  adopted  custom  of  action, 

—  as,  for  example,  private  property,  inheritance,  govern- 
ment, taxation,  competition,  credit.  Thus,  these  institu- 
tions, when  regarded  from  the  aggregate  and  social  point 
of  view,  are  merely  qualities  and  attributes  of  the  human 
factor  in  production,  affecting  the  product.  They  are  man 
as  distinguished  from  environment,  possessor  not  possession, 
artisan  not  instrument,  laborer  not  equipment,  operator  not 
appliance,  internal  not  external  facts ;  they  belong  to  the 
organism  and  not  to  the  outside  world.  But  looked  at  from 
the  competitive  and  distributive  point  of  view,  their  chief 
significance  is  in  affecting  the  terms  of  the  division  of  the 
aggregate  product. 

Man  and  Environment :  the  interactions.  —  For  a  gen- 
eral understanding  either  of  man  or  of  environment  at  any 
given  time,  much  must  be  allowed  both  for  the  accumulated 
influence  of  the  environment  upon  man,  and  of  man  upon  the 
environment.  Just  as  we  note  that  polar  bears  are  white, 
and  grass  snakes  green  or  striped  —  that  bees  taken  to  a 
climate  of  continual  summer  lose  their  habit  of  accumulating 
honey  —  that  the  fish  in  Mammoth  Cave  are  without  eyes 

—  that  the  cultivated  strawberry,  set  in  the  poor  soil  of 
the  field  to  make  its  way  against  grass  and  weeds,  reverts 
to  its  wild  form,  —  so  we  find  that  the  types  of  mankind 
reflect  in  countless  ways  the  influence  of  environmental 
conditions.  And,  equally  clearly,  the  environment  reflects 
the  modifying  power  of  men.  Waiving,  for  the  moment, 
the  question  of  which  factor  has  the  more  affected  the  other, 
we  may  safely  assert  that  man  is  not  entirely  the  master  of 
his  fate,  nor  yet  entirely  the  puppet  of  the  forces  by  which 
he  is  surrounded.  He  is  himself  a  force,  a  center  of  energy 
and  activity.  He  is  one  of  the  facts  in  the  complex  interplay 
of  human  with  natural  energies.  If  he  receives,  he  gives. 
If  his  environment  rains  its  influences  upon  him,  he  puts 
forth  his  own  efforts  in  adapting  self  to  environment  or  en- 


12  THE   ECONOMICS  OF  ENTERPRISE 

vironment  to  self.  Ho  strives  and  resists  and  reacts.  George 
Eliot  has  put  the  case  helpfully,  when,  in  supplement  to 
the  half-truth,  "  Our  deeds  are  fetters  which  we  forge  our- 
selves," she  adds,  "  Aye,  but  I  think  it  is  the  world  that 
brings  the  iron."  The  history  of  human  development  is  the 
storj^  of  what  circumstance  has  done  for  man  and  man  for 
circumstance  —  the  play  of  outside  forces  upon  him  and  his 
reactions  thereto.  There  are  thus  two  forces  in  the  prob- 
lem of  history,  —  man  and  nature.  The  resultant  is  the 
direction  of  human  development. 

This  is  not  a  difficult  notion.  As  has  already  been  stated, 
it  is  merely  one  aspect  of  that  which  men  of  science  call  the 
law  of  adaptation,  or  of  correspondence  to  environment. 
It  is  imnecessary  for  the  purposes  of  Political  Economy  to 
push  the  question  into  an  inquiry  as  to  which  of  these  two 
forces  in  human  development,  if  either,  is  the  primary  fact 
and  which  the  derivative.  We  may,  for  example,  regard 
coral  polyps  as  a  product  of  the  sea ;  it  is  none  the  less  true 
that,  once  existing,  they  not  merel}^  suffer  but  work  the 
processes  of  sea  change.  It  constantly  occurs  that  a  result 
becomes  in  turn  a  cause,  —  as,  for  example,  in  chemistry, 
where  a  product  of  combination  or  decomposition  furnishes 
a  basis  for  a  new  series  of  chemical  changes ;  or  in  physics, 
where  in  a  row  of  blocks  one  falls  as  the  result  of  an  impact 
received,  and  by  delivering  its  impact  causes  the  next  to 
fall ;  or,  in  chemistry  again,  where  combustion  liberates 
gases  which  themselves  furnish  material  for  further  com- 
bustion.    Most  things  grow  by  what  they  feed  on. 

Partly,  thus,  because  environments  differ,  we  find  wide 
differences  between  different  races  of  men,  and  between 
different  men  of  the  same  race.  We  need  not  assert  that 
all  of  these  differences  are  due  to  environment;  clearly 
enough,  however,  some  of  them  are.  The  human  race  ex- 
hibits the  effects  of  adaptation  otherwise  than  in  color  and 
physical  power.  Men  have  been  profoundly  influenced  by 
their  surroundings  not  only  in  health,  strength,  and  stature, 
but  also  in  habits,  character,  energy,  and  intelligence.  One 
need  only  call  to  his  aid  his  knowledge  of  geography  to  find 
this  truth  many  times  verified. 


FUNDAMENTAL  CONDITIONS  13 

Adaptations  are  mostly  organic  and  mostly  intellectual.  — 
If  now  we  turn  to  a  more  extended  study  of  the  significance 
of  the  original  environment,  and  to  a  more  thorough  examina- 
tion not  only  of  the  uses  which  man  has  made  of  it  but  of 
the  changes  which  he  has  worked  in  it  and  of  his  methods 
of  adaptation  to  it,  we  enter  upon  a  field  of  surpassing  in- 
terest but  of  endless  detail.  It  will,  however,  become  in- 
creasingly clear  that,  despite  all  that  man  has  done  in  the 
modification  of  the  habitat  and  in  the  accumulation  of  equip- 
ment, by  far  his  greater  progress  has  been  worked  out  on  the 
line  of  adapting  self  to  environment  rather  than  environment 
to  self,  and  that  the  most  and  the  best  of  these  adaptations  of 
man  to  his  environment  have  been  intellectual  adaptations. 
In  large  measure,  indeed,  this  is  what  we  mean  by  civiliza- 
tion. Of  this  sort  are  the  mechanical  inventions  already 
noted :  "  The  development  of  the  material  civilization  per- 
forms for  man  the  same  service  which  actual  physical  adapta- 
tion discharges  for  plants  and  animals."  ^ 

Man  has,  doubtless,  done  not  a  little  by  his  sldll  to  adapt  his 
environment  to  himself.  He  has  cleared  forests,  drained  lands  and 
fertilized  them,  dug  canals,  made  roads,  hewed  tunnels,  filled  valleys, 
and  laid  mountains  low.  Something  more  he  has  done,  also,  not 
easily  distinguishable  from  these  achievements :  He  has  improved 
upon  his  environment  by  adding  to  it,  by  erecting  factories  upon  it ; 
he  has  mined  things  out  of  it,  metals  and  fuel  —  or  made  things  over 
from  it,  machines  and  tools  —  or  harnessed  it  to  do  his  bidding,  in 
steam  and  wind  and  tide  and  waterfall.  He  has  tamed  its  products 
to  his  use,  animal  and  vegetable  —  crossed  them,  selected  them, 
perfected  them.  And  he  has  opened  up  new  uses  for  them  as  con- 
sumption goods,  as  well  as  new  methods  with  them  as  production 
goods.  He  has  gone  down  to  the  sea  in  ships ;  he  has  learned  its 
habits  and  tempers,  and  why  and  where  and  when  and  how  to  sail 
it,  in  whatever  varying  new  models  of  craft  or  new  methods  of 
motive  power. 

Note,  however,  that  much  of  this  accomphshment  is  not,  in  any 

1  Gregory,  Keller,  and  Bishop,  Physical  and  Commercial  Geog- 
ra-phy,  p.  127.  This  admirable  work  has  been  ruthlessly  pillaged 
for  facts  and  materials  for  purposes  of  the  present  discussion.  The 
quotations  in  the  half-dozen  pages  following  are  all  from  this  source  ; 
and,  for  what  remains,  liberal  use  has  been  made  of  paraphrase. 


14  THE  ECONOMICS  OF  ENTERPRISE 

accurate  sense,  a  conquest  of  nature  or  even  a  modification  of  it. 
By  almost  insensible  gradations  these  various  successes  shade  off 
into  somctliing  quite  different  from  conquest — into  adaptations 
which  are  not  so  much  a  modifying  of  the  objective  conditions  with 
which  man  has  to  deal  as  a  conforming  of  himself  and  of  his  methods 
to  the  situation  which  he  has  to  face.  In  point  of  fact,  also,  liis 
actual  accomplishments  of  conquest,  many  and  splendid  though 
the}--  are,  go  hardly  more  deep  than  skin  scars.  In  lai-ger  part  his 
triumphs  have  been  of  another  sort  —  triumphs  of  strategy  or  of 
evasion  rather  than  of  conquest.  So  much,  however,  he  has  ac- 
comphshed  in  the  total  that  he  is  prone  not  to  see  accurately  what 
it  is  or  what  were  the  methods  —  whether  he  has  really  leveled  the 
obstacles  before  him,  or  has  rather  climbed  over  or  gone  round  them. 
His  exploits  do  not  commonly  appear  to  him  to  be  an  adaptation  of 
himself  to  conditions  which  he  could  not  alter :  "He  often  thinks  he 
is  conquering  nature  when  he  is  really  discovering  nature's  laws  and 
conforming  to  them.  Man  can  neither  create  nor  anniliilate  nat- 
ural forces :  under  many  conditions  he  is  their  pla.ything,  but  by 
observing  their  ways  ha  can  often  so  direct  liis  own  action  in  respect 
to  them  as  to  escape  detriment  or  even  gain  profit  from  their  action." 

Those  modifications,  then,  with  winch  the  issues  of  civilization 
chiefly  rest,  are  changes  taldng  place  in  the  human  factor  in  the 
problem  —  modifications  in  the  organism,  either  for  good  or  for  ill. 
And  in  the  main,  also,  as  has  already  been  suggested,  these  modifica- 
tions are  of  the  intellectural  rather  than  the  physical  type ;  and 
especially  is  tliis  the  case  for  such  modifications  as  are  advantageous. 
And  note  also  that  changes  of  the  purely  physiological  or  instinctive 
type  —  those  varieties  of  change  to  wlfich  the  adaptations  in  the 
lower  orders  of  life  are  almost  entirely  confined  —  are  limited  in 
number  and  are  of  relatively  slow  accomplishment.  Some  changes 
of  this  sort,  however,  there  undoubtedly  are,  as,  for  example,  in  the 
pigments  of  the  skin  ;  in  increased  power  of  resistance  to  cold  or 
heat ;  in  acquired  immunity,  complete  or  partial,  to  certain  forms  of 
bacterial  menace.  Antitoxins  appear,  indeed,  to  have  been  racially 
elaborated  to  the  point  of  furnishing  a  partial  immunity  against 
certain  diseases. 

There  can,  in  fact,  be  no  question  that  it  is  through  the  processes 
of  intellectual  adaptation  that  human  progress  mostly  takes  place, 
as  it  is  to  the  lack  of  these  adaptations  that  stagnation  or  retrogres- 
sion is  often  due.  It  may,  however,  be  true  that  it  is  the  environ- 
ment that  in  most  cases  determines  what  intellectual  modifications 
shall  take  place  and  how  far  they  are  to  be  effective  either  for  good 
or  for  ill. 


FUNDAMENTAL  CONDITIONS  15 

Especially  in  questions  of  climate  do  these  intellectual  modifica- 
tions count  for  much  with  the  human  race.  Lacking  self-grown  fur, 
man  appeals  to  the  arts  and  implements  of  the  chase,  or  to  his  skill 
in  textile  making,  fending  thus  both  against  arctic  winds  and  torrid 
suns.  His  intellect  levies  tribute  for  him  upon  the  fauna  and  the 
flora  of  his  environment.  Houses  are  only  looser  fitting  clothes  — 
as  perhaps  the  snail  might  credibly  bear  witness.  And  these  cli- 
matic adaptations  of  the  intellectual  sort  go  further :  If  men  cannot 
acquire,  through  mere  use  and  wont,  immunity  against  disease,  they 
can,  in  many  cases,  remove  the  causes  —  drain  the  swamps,  suppress 
the  mosquitoes,  destroy  the  rats.  Man  teaches  himself  new  methods 
of  diet,  new  rules  of  work  and  of  rest,  new  habits  of  living.  Out  of 
his  knowledge  of  bacteriology,  he  provides  himself  with  prophylac- 
tics and  preventives.  In  short,  he  summons  to  his  aid  the  resources 
of  modern  sanitation,  of  preventive  medicine,  and  of  remedial  medi- 
cine. 

The  limits  of  adaptation.  —  It  should  now  be  clear  that, 
under  the  most  favorable  as  well  as  under  the  least  favor- 
able conditions,  the  better  part  of  man's  adaptation  has  been 
an  adaptation  of  self  to  environment  rather  than  of  environ- 
ment to  self ;  and  that  it  has  been,  on  the  whole,  an  intellec- 
tual rather  than  a  physical  adaptation.  In  the  fact  that 
man  has  taken  thought  "  is  the  key  to  his  special  power  of 
adaptation ;  .  .  .  this  sets  man  apart  from  the  rest  of  the 
animal  world :  .  .  .  weaker  in  body,  slower  of  foot,  duller 
of  scent  and  sight,  ...  he  becomes  superior  to  them  all 
through  his  capacity  for  mentally  conceiving  the  require- 
ments of  a  situation  and  taking  advantage  of  them." 

In  the  main,  however,  these  processes  do  not  go  far. 
Unfavorable  climates  and  their  attendant  diseases  are  likely 
to  prevail  in  the  contest.  That  these  diseases  tend  with 
time  to  become  less  virulent,  is  merely  another  aspect  of  the 
fact  that  while  they  are  new  they  make  frightful  ravages. 
The  racial  reaction  is  discouragingly  slow,  and  defeat  is 
commonly  declared  in  the  earlier  contests.  But,  in  any 
case,  defeat  is  almost  certain,  unless  the  change  in  habitat 
takes  place  gradually,  or  unless  the  process  of  acclimatiza- 
tion comes  about  along  the  line  of  intellectual  adaptation. 

But,  at  the  best,  man's  battle  for  tropic  victory  is, 
on  the  whole,  a  losing  battle.     Something  he  does ;  yet  he,  or 


16  THE  ECONOMICS  OF  ENTERPRISE 

his  children,  or  his  ohildron's  children,  one  day  give  up  tho 
struggle.  The  tiger  and  tiie  hyena  man  may  drive  from 
the  jungle;  even  the  venomous  snakes  he  may  exterminate. 
Possibly,  also,  he  may  hold  afar  off  the  pestilences  of  the 
night  and  the  wasting  fevers  of  the  noonday.  But  the  torrid 
heat  is  still  there  :  if  he  remains  with  it,  he  finally  surrenders 
to  it,  is  paralyzed  by  its  bounties,  lulled  to  its  languors, 
relaxed  to  its  temptations,  weakened  to  the  level  of  its  tasks. 
For  it  is  evident  that,  with  the  passing  centuries,  civiliza- 
tion is  not  advancing  its  frontiers  further  into  the  tropics ; 
rather  it  is  progressively  retreating,  making  good  this  loss 
by  new  conquests  further  toward  the  poles.  From  its  sub- 
tropical cradle  civilization  has  moved  steadily  north  and 
west.  The  beginnings  had  to  be  made  where  the  problem 
was  easy  —  where  some  energy  for  progress  could  remain 
over  from  the  sheer  necessities  of  living.  These  early  habitats 
were  the  racial  kindergartens.  But  their  discipline  once 
conferred,  the  problem  grew  too  easy  to  be  disciplinary. 
Thereafter,  only  habitats  more  urgent  in  needs  and  more 
austere  in  gifts  could  afford  the  conditions  of  progress. 
The  original  habitat  meant  henceforth  a  deterioration  of 
racial  stock.  "  Bread  fruit,  introduced  from  the  Pacific, 
is  said  to  have  carried  the  Caribs  back  to  savagery."  So- 
cieties, like  individuals,  when  once  mature,  demand  meat 
fit  for  men.  The  tests,  the  problems,  the  gymnastics  of 
childhood,  must  be  put  away  with  all  other  childish  things. 
Tasks  require  to  be  apportioned  to  strength ;  tepid  baths 
for  the  sick,  but  the  cold  douche  for  the  strong.  The  best 
temperature  is  the  reaction  limit.  Even  for  moral  growth 
ignorance  and  irmocence  are  not  one  but  two;  one  rightly 
prays  only  that  he  be  not  led  into  temptation  beyond  his 
strength. 

It  may,  then,  be  taken  as  established  that  a  high  level  of 
civilization  is  impossible  in  those  zones  where  the  snow  never 
falls.  Precisely  as  progress  is  too  difficult  a  problem  in  the 
frigid  zones  for  any  race  yet  fully  to  have  solved  it,  so  the 
problem  of  mere  existence  in  the  tropics  is  so  over-easy  of 
solution  as  to  have  degraded  man,  through  stagnation  and 
ignorance,  into  an  incapacity  for  civilization. 


FUNDAMENTAL  CONDITIONS  17 

The  relative  plenty  or  scarcity  of  products.  —  Still  con- 
fining ourselves  to  this  large  and  aggregate  and,  in  the  main, 
social  view  of  production,  we  find  no  difficulty  in  under- 
standing why  those  things  that  are  easy  to  get  are  relatively 
plenty,  and  those  things  difficult  to  get  are  relatively  scarce ; 
or  in  understanding  how  things  are  relatively  easy  to  get 
when  the  labor  and  the  instruments  for  their  production  are 
relatively  plenty.  In  countries  where  the  land  and  the  sun 
and  the  air  are  especially  favorable  for  the  production  of 
fruit,  fruit  is  likely  to  be  plenty  and  is,  therefore,  likely  to 
be  cheap.  Or  —  were  we  yet  ready  to  discuss  competition 
and  prices  —  the  same  facts  might  be  interpreted  to  mean 
that  because  of  the  abundant  means  of  production,  the  costs 
of  production  are  relatively  low  and  the  products  therefore 
low  in  price :  that  winter  flowers  and  summer  ice  are  nec- 
essarily dear ;  that  fish  are  low  priced  at  the  ocean  side,  be- 
cause, the  facilities  for  production  being  practically  without 
limit,  nothing  need  be  paid  for  the  opportunity  to  use  them. 
Goods  at  a  distance  from  the  conditions  favorable  to  their 
growth  or  extraction  must  sell  at  an  increase  in  price  because 
of  the  greater  difficulty  of  attainment.  In  a  social  view, 
these  difficulties  of  attainment  express  themselves  merely 
as  the  relative  scarcity  of  the  means  of  production ;  in  the 
competitive  economy,  as  higher  money  costs  of  production. 
Transportation  is  itself  one  of  the  processes  of  production. 
Goods  which  can  be  transported  only  short  distances,  or  not 
at  all,  are  markedly  cheap  where  the  facilities  for  their 
production  are  especially  plenty,  and  markedly  dear  where 
the  facilities  are  especially  scarce. 

But  causes  of  plenty  or  scarcity  of  products  are  to  be 
traced,  not  solely  to  environmental  conditions,  but  also  to 
plenty  or  scarcity  on  the  human  side.  Where  any  line  of 
ability  is  common,  the  products  from  it  will  be  plenty.  The 
result  in  a  competitive  society  must  be  that  this  line  of 
ability  will  be  poorly  paid  and  its  derivative  products  low 
priced.  Carvings  are  cheap  in  Oberammergau,  music  in 
Italy.  When  doctors  of  philosophy  are  plenty,  they  may 
command  no  more  per  year  than  the  football  coach  —  a 
scarcer  sort  of  man  —  may   claim  per  month,  —  it   being 


18  THE  ECONOMICS  OF  ENTERPRISE 

assumed,  of  course,  that  the  services  of  both  sorts  of  men 
are  wanted. 

We  have,  then,  come  thus  far  in  our  analysis :  On  the 
appetitive  side  man  is  a  being  of  needs  and  desires  which  he 
must  satisfy  mainly  through  the  various  processes  of  pro- 
duction. His  success  as  a  producer  is  twofold  in  aspect : 
(1)  his  personal  powers  and  capacities  —  his  character  as 
organism ;  (2)  the  nature  of  his  habitat  —  his  possessions, 
his  exterior  equipment  both  as  aid  or  opportunity  and  as 
limitation.  What  things  he  produces  and  how  many  are 
questions,  on  the  one  side,  of  what  he  wants  —  on  the  other 
side,  the  suppl}^  side,  questions  of  his  productive  power ; 
what  he  has  depends  upon  what  he  can  do,  and  what  he 
can  do  depends  upon  what  he  is  and  what  he  has  to  do  with. 

Chapter  II  will  examine  the  institutional  conditions  under 
which  the  production  of  wealth  takes  place ;  the  charac- 
teristic traits  of  a  competitive  individualistic  society;  its 
pecuniary  organization ;  the  relation  of  the  price  system  to 
its  organized  activities ;  private  property  and  the  relation 
of  it  to  private  gain;  the  significance  of  money  and  of 
pecuniary  methods  and  standards ;  the  concepts  of  price 
and  of  value;  the  delimitation  of  the  economic  field;  and 
the  definition  of  Political  Economy.  And  from  all  this  some 
advance  will  be  made  toward  an  understanding  of  what  is 
meant  by  the  Regime  of  Price  and  what  is  the  nature  of 
competitive  institutions. 


CHAPTER  II 

COMPETITIVE  ECONOMICS  ;    THE  REGIME  OF  PRICE 

Institutions  change.  —  It  is  a  bad  habit  of  thought  to 
assume  that  present  conditions  —  and  especially  the  present 
economic  organization  —  have  always  been  much  as  they  are ' 
now,  and  will  always  remain  so.  We  have,  it  is  true,  an 
existing  regime  of  which  the  leading  traits  are  private  prop- 
erty, individual  initiative,  and  competitive  production  for 
the  purposes  of  exchange.  And  to  say  that  men  produce 
things  mostly  for  the  purpose  of  selling  them  amounts  to 
saying  that  in  business  affairs  all  of  us  are  trying  to  get  money 
for  goods  —  are  reckoning  our  gains  in  terms  of  market 
price  —  are  making  all  of  our  economic  activity  turn  upon 
a  money  computation. 

But  other  bases  and  methods  have  prevailed  and  may 
equally  well  prevail  again.  The  times  when  slavery  was 
general  were  obviously  times  when  there  existed  quite  a 
different  property  system.  There  was  private  property, 
to  be  sure,  the  slaves  themselves  being  the  property  of  their 
owners ;  but,  in  fact,  the  slaves  themselves  might  have  been, 
and  have  at  some  times  been,  the  slaves  of  the  community 
—  the  city,  village,  or  state.  Slavery  does  not  necessarily 
imply  private  ownership.  So  villages  have  often  been  the 
owners  of  the  agricultural  lands,  and  in  some  parts  of  the 
world  they  still  are  so.  Much  land  now  —  parks,  streets, 
sites  of  public  buildings  —  is  owned  in  common  public  owner- 
ship. The  single-tax  people  urge  strongly  that  in  substance 
all  land  ought  now  to  be  so  owned.  And,  on  quite  different 
grounds,  some  socialists  urge  this  same  view ;  and  they  go 
yet  further ;  they  want  all  of  the  instruments  and  means 
of  production,  social  capital,  to  be  owned  in  common.  Two 
or  three  hundred  years  ago,  in  English  Agriculture,  some  of 

19 


20  THE  ECONOMICS  OF  ENTERPRISE 

the  farm  machinery,  most  of  the  male  breeding  stock,  and 
practically  all  of  the  wood  and  pasture  lands  were  the  joint 
property  of  the  residents  of  the  manor.  It  has  long  been 
true  that  in  many  countries  the  railroads  arc  public  property. 
The  forests  and  the  mines  and  the  water  powers  may  at  no 
very  distant  day  come  to  belong  to  the  people  in  general. 
These  things,  indeed,  may  not  be  far  off,  even  for  America. 

Competition  merely  a  present  institution.  —  It  is  no  part 
of  the  present  purpose  to  urge  the  desirability  of  all  or  any 
of  these  changes,  but  simply  to  point  out  that  little  that  is, 
in  the  present  social  and  economic  order,  has  long  been  as 
it  now^  is,  that  much  of  it  has  not  been  at  all,  and  that  little 
of  it  is  fundamental  or  sure  to  last.  Private  property,  in- 
dividual initiative,  competition,  the  money  system,  and  pro- 
duction for  the  price  market  are  mere  present  adjustments, 
no  one  of  which  has  always  been,  or  is  everywhere  now,  or  is 
certain  to  remain.  Each  order  becomes  old  and  changes, 
and  nothing  in  human  life  is  certain  but  this  process  of  change. 
And  nothing  of  it  all  is  right  or  just  or  good  in  the  sense  that 
it  must  endure,  or  that  something  else  may  not  better  take 
its  place. 

"Fair  virtues  waste  with  time; 
Foul  deeds  grow  fair  thereby." 

One  form  of  life  prospers  by  good  fighting,  another  by  good 
running  away  or  by  good  hiding.  Fang  and  venom  and 
stink  glands  in  their  times  and  places  have  their  uses.  In 
a  warlike  and  predatory  society  the  qualities  that  are  most 
essential,  and  therefore  the  most  commendable,  —  qualities 
in  the  absence  of  which  group  survival  would  be  impossible 
—  rusefulness  and  ruthlessness  and  thirst  for  blood,  —  in  an 
industrial  society  occasion  its  crimes  of  violence,  its  feuds, 
its  jingo  wars,  its  poisoned  foods,  its  poisoned  poisons.  That 
modern  industrial  society  has  its  pirates  is  not  surprising  in 
view  of  the  fact  that  only  a  few  centuries  ago  piracy  was  the 
chief  business  of  some  of  our  ancestral  races.  The  Napoleon 
of  current  finance  is  the  lineal  descendant  of  the  tenth  cen- 
tury viking.  He  succeeds  now  by  virtue  of  the  qualities 
which  gave  success  then.     But  at  that  time  his  prowess 


COMPETITIVE  ECONOMICS  21 

was  socially  serviceable ;  the  intervening  years  have  now 
brought  it  about  that  we  no  longer  need  him  ;  rather  we  need 
to  be  rid  of  him.  What  was  once  predation  for  group  wel- 
fare is  now  become  predation  upon  the  group.  The  early 
type  of  prowess  is  now  grown  untimely.  The  best  wolf 
for  wolf  purposes  makes  an  especially  bad  sheep  dog.  For 
jungle  times  the  jungle  problem  calls  for  jungle  qualities. 
Everywhere  survival  of  the  fittest  means  merely  the  survival 
of  the  fittest  to  survive.  A  sympathetic  hyena  or  a  benev- 
olent tiger  would  be  a  failure  and  a  misfit  for  his  peculiar 
problems.  Institutions  likewse  are  good  or  bad  according 
to  the  degree  of  human  development  and  the  problems  of 
the  time.  Only  that  government  is  good  which  both  gov- 
ernors and  governed  are  fit  for.  The  same  form  might  be 
the  best  or  the  worst  according  to  the  men  and  the  occasions. 
The  need  of  the  present  is  to  develop  new  virtues  and,  in  not 
a  few  cases,  to  get  rid  of  the  old.  Absolute  good  there  may 
somewhere  be,  but  most  good  is  merely  relative  good.  That 
which  is,  may  be  right,  but  not  in  the  sense  that  what  is  to 
come  may  not  be  better. 

The  competitive  order  a  pecuniary  order. — Modern  society 
is,  then,  distinctly  a  pecuniary  society,  a  society  of  business. 
Despite  the  fact  that  society  was  not  always  pecuniary,  —  has, 
indeed,  been  so  only  for  the  narrowest  margin  of  years  out 
of  a  long  human  history,  and  may  remain  so  only  for  the 
next  short  swing  of  the  pendulum  in  the  life  of  man,  — 
the  political  economy  that  we  must  study  to-day  is  the  polit- 
ical economy  of  to-day.  Mainly,  under  present  conditions, 
we  produce  for  the  market,  for  exchange,  despite  the  fact 
that  a  few  generations  ago  the  contrary  was  the  truth.  And 
at  present  we  produce  in  the  larger  part  for  a  competitive, 
impersonal  world  market.  This  is  the  era  of  free  individual 
initiative  under  private  property  for  private  gain.  So  far, 
indeed,  is  this  the  truth  that  even  combination  and  monopoly 
may  be  regarded  as  merely  secondary  aspects  of  competition 
and  of  individual  initiative.  Strike  this  fact  of  competition 
at  its  very  center  of  tone,  and  we  discover  that  we  are  in 
a  regime  of  price.  Money  is  the  focusing  point  of  modern 
business  affairs.     It  is  the  standard  of  values  simply  because 


22  THE  ECONOMICS  OF  ENTERPRISE 

in  a  society  producing  for  exchange  it  is  the  one  established 
intermediate  commodity  Therefore,  as  medium  of  ex- 
change, it  is  the  standard  of  immediate  and  of  deferred 
payments.  Through  credit,  the  money  economy  lays  hold 
upon  even  the  distant  future.  Thus  to  object  that  more 
anil  more,  as  society  has  advanced  from  a  society  of  isolated 
production  through  a  barter  economy  to  a  money  economy, 
it  is  now  moving  over  into  a  credit  economy,  is  really  to 
assert  merely  that  in  new  and  marvelous  ways  money  is 
taking  on  a  still  greater  emphasis.  More  and  more,  and  more 
and  more  exclusively,  and  over  an  ever  widening  field  of 
human  effort,  human  interests  and  desires  and  ambitions 
fall  under  the  common  denominator  of  money.  Doubtless 
many  of  the  best  things  in  life  do  not  get  bought  and  sold. 
Some  of  them  are  not  exchangeable ;  and  not  all  things 
that  could  be  transferred  are  men  weak  enough  to  sell  or  other 
men  strong  enough  to  buy.  Not  every  man  has  his  money 
price.  But  most  good  things  do,  in  greater  or  less  degree, 
submit  to  the  money  appraisal.  Health  is  easier  for  him 
who  can  take  his  ease  and  who  has  the  wherewithal  to  pay 
for  good  foods  and  medicines,  to  travel,  to  employ  good 
nursing,  and  to  command  capable  physicians  and  efficient 
surgeons.  And,  in  their  degree,  also,  love  and  pity  and 
respect  and  place,  are  bought  and  sold  upon  the  market. 
It  takes  a  goodly  number  of  dollars  to  get  a  child  safely 
born,  and  even  more  dollars  to  achieve  for  one's  self  a  re- 
spectable burial.  Much  money  is  power  over  many  things. 
Money  is  the  standard  of  value  in  the  sense  that  all  values 
of  all  exchangeable  things  are  expressed  in  terms  of  it.  And 
this  holds,  not  only  of  all  commodities  and  services,  but  of 
all  incomes  and  of  all  capitals.  The  capital  of  a  banking 
house,  or  a  factory,  or  a  railroad  company  is  not  a  congeries 
of  tangible  things,  but  a  pecuniary  magnitude  —  so  many 
dollars.  All  economic  comparisons  are  made  in  money 
terms,  not  in  terms  of  subsistence  or  of  beauty  or  of  artistic 
merit  or  of  moral  deserving.  This  same  standard  tends  to 
become  also  the  test  and  measure  of  human  achievement. 
Men  engage  in  business,  not  solely  to  earn  a  livelihood,  but 
to  win  a  fortune  in  a  pecuniary  sense.     To  win  by  this  money 


COMPETITIVE  ECONOMICS  23 

test  is  to  certify  one's  self  tangibly  and  demonstrably  as 
having  scored  in  the  most  widespread  and  absorbing  of  com- 
petitions. Is  one  a  great  artist  —  what  do  his  pictures  sell 
for?  Or  what  is  the  income  of  this  leading  advocate?  or 
of  that  famous  singer?  How  great  are  the  author's  royal- 
ties? The  pecuniary  standard  tends  to  be  carried  over  into 
non-pecuniary  fields. 

It  is  almost  past  belief  how  far  both  in  degree  and  in  direc- 
tion money  valuations  pervade  all  our  thinking.  Cheap- 
ness is  prone  to  be  synonymous  with  ugliness,  richness  with 
beauty,  elegance  with  expensiveness.  No  one  can  tell  for 
himself  where  the  really  aesthetic  begins  and  the  sheer  pe- 
cuniary ends.  In  the  field  of  morals,  also,  the  so-called 
cash-register  conscience  is  an  actual  thing.  And  one  might 
go  still  further  and  note  that  almost  all  great  political  issues, 
and  almost  all  absorbing  social  problems,  and  almost  all 
international  complications  rest  upon  a  pecuniary  basis. 
Our  national  problems  are  tariff,  labor  unions,  strikes,  money, 
trusts,  banking,  currency,  railroads,  conservation  of  resources, 
shipping,  taxation.  Success  in  elections,  in  the  selection  of 
senators,  in  the  making  of  laws,  and  in  the  selection  of  judges 
is  prone  to  be  desired  for  financial  ends  and  to  be  decided  by 
pecuniary  means.  Diplomatic  complications  hinge  upon 
trade  connections,  the  open  door,  fisheries  and  sealeries, 
colonies  for  markets,  and  spheres  of  influence  for  trade. 
Navies  are  trade  guardians  and  trade  auxiliaries.  Elimi- 
nate from  local  politics  the  influence  of  the  public  service 
corporation,  of  the  contractor,  and  of  the  seekers  for  special 
pecuniary  privileges,  and  what  is  left  of  the  municipal  prob- 
lem will  be  mostly  the  pecuniary  nexus  of  the  slum  with  the 
ballot  box,  of  the  saloon  with  the  police  system,  and  of  saloon 
and  slum  and  brothel  with  the  city  hall. 

And  now  we  are  belatedly  ready  for  a  few  definitions  techni- 
cally formulated  for  economic  purposes  : 

Money  is  the  intermediate  commodity  for  which  goods  are 
commonly  sold. 

The  price  of  any  specific  thing  (good)  reports  its  exchange 
relation  to  money. 


24  THE  ECONOMICS  OF  ENTERPRISE 

The  value  of  any  specific  thing  reports  its  exchange 
rehition  to  any  good,  money  or  other. 

That  is  to  say,  price  is  a  particular  instance  of  value. 
Both  value  and  price,  therefore,  are  methods  of  expressing 
the  exchange  ratio  between  two  different  goods  quantitatively 
specified.  Price  is  merely  a  particular  instance  of  value  — 
the  case  where  one  of  the  exchanged  goods  is  money.  So  we 
say  that  the  price  of  a  particular  horse  is  -SlOO,  and  that  the 
value  of  this  horse  is  two  particular  cows,  or  two  cows  of  a 
certain  definite  grade ;  or  is  twenty  particular  sheep,  or 
twenty  sheep  of  a  certain  definite  grade ;  or  is  a  certain  100 
pounds  of  wheat,  or  100  pounds  of  a  certain  definite  grade. 

The  field  of  economic  science.  —  The  time  has  arrived, 
also,  for  a  definition  of  Political  Economy  in  the  present 
competitive  order.  But  first  it  must  be  noted  that  no  science 
is  to  be  delimited  by  the  nature  of  its  subject  matter.  Test 
this  by  finding,  for  example,  from  the  point  of  view  of  how 
many  sciences  you  may  discuss  a  stick  of  wood.  Pretty 
much  any  fact  may  form  part  of  the  subject  matter  of  pretty 
nearly  every  science.  All  knowledge  is  somehow  or  other 
related  to  all  other  knowledge,  and  every  fact  to  every  other 
fact  —  since  this  is  a  real  universe  in  which  we  live,  an  or- 
ganized, interrelated  whole.  Man's  commercial  and  indus- 
trial activities,  his  business  of  getting  a  living,  are  in  countless 
points  of  contact  with  questions  of  social  morality  and  of 
physical  health;  with  questions  of  pedagogy  and  of  juris- 
prudence ;  with  chemistry  and  physics ;  with  religion, 
criminology,  and  penology;  with  psychology,  sanitation, 
bacteriology,  and  dietetics.  Geography  is  handmaid  to  trans- 
portation. Geology  discloses  the  gold  and  silver  mines. 
Astronomy  may  hide  the  secret  of  droughts  and  famines. 

That  which  delimits  a  field  of  science  is,  therefore,  not  the 
field  of  facts  treated,  but  the  purpose  for  which  the  facts  are 
treated  —  the  point  of  view  or  of  approach,  as  determined 
by  the  central  problem  under  investigation.  As  political 
economists  we  have  small  concern,  then,  with  the  Australian 
ballot  law  or  with  the  popular  election  of  senators ;  ours  is 
not  the  problem  of  government.  Nor  shall  we  investigate 
the  chemistry  of  dyestuffs,  or  the  physics  of  waterfalls  or 


COMPETITIVE  ECONOMICS  25 

of  steam,  or  the  problems  of  the  electric  motor.  Yet  we 
must  do  all  this  were  the  political  economy  of  present  so- 
ciety rightly  defined  as  "an  inquiry  into  the  nature  and 
causes  of  the  wealth  of  nations  "  (Adam  Smith)  ;  or  as  the 
"  science  of  the  production  and  distribution  of  wealth  " 
(J.  S.  Mill) ;  or  as  the  study  that  ''  examines  that  part  of 
individual  and  social  activity  which  is  most  closely  con- 
nected with  the  attainment  and  with  the  use  of  the  material 
[?]  requisites  of  well-being  "  (Marshall) ;  or  as  an  "  inquiry 
concerned  with  the  production,  distribution,  and  exchange 
of  wealth  and  services  "  (Sidgwick)  ;  or  as  the  science  that 
"  deals  with  those  activities  of  man  which  are  directed  toward 
securing  a  living  "  (Bullock)  ;  or  as  "  the  study  of  the  ma- 
terial world  and  of  the  activities  and  mutual  relations  of  man 
so  far  as  all  these  are  the  objective  conditions  of  satisfying 
desires  "  (Fetter) ;  or  as  "  the  science  which  treats  of  those 
social  phenomena  that  are  due  to  the  wealth-getting  and 
wealth-using  activities  of  men  "  (Ely) ;  or  as  "  the  social 
science  that  treats  of  man's  wants  and  of  the  goods  upon 
which  the  satisfaction  of  his  wants  depends "  (Seager) ; 
or  as  the  "  science  of  man  in  his  business  relations  to  wealth  " 
(Seligman).  Better  than  any  of  these,  as  hinting  at  the  exist- 
ence of  a  point  of  view  or  of  a  central  problem,  is  Johnson's 
formulation :  "  Economics  is  the  science  which  deals  with 
wealth  in  its  most  general  aspect ;  namely,  its  value  aspect." 
Still  better,  perhaps,  is  the  following :  The  science  that 
treats  phenomena  from  the  standpoint  of  price ;  — thereiore, 
mostly,  industry  and  business. 

It  is,  in  fact  the  value  problem,  —  or  more  specifically 
and  more  accurately  for  present  society,  —  the  problem  of 
market  price,  that  is  the  central  and  unifying  problem  of 
present-day  economics.  Price,  then,  must  attend  and  char- 
acterize all  things  that  are  economic ;  and  all  things  so  at- 
tended are  so  far  economic  in  character.  And  more  things 
than  those  which  accurately  are  material  must  fall  within 
the  scope  of  price.  Price  extends  its  sway  to  the  utmost 
limits  of  whatever  is  property,  tangible  or  intangible,  — 
whether  material  or  immaterial.  Property  covers  —  and 
therefore  price  covers  —  debts,  good  will,  franchises,  —  every- 


26  THE  ECONOMICS  OF  ENTERPRISE 

thiug  that  is  bought  or  sold.  Price  includes  also  many  non- 
property  facts  —  human  services,  such  as  the  goods  for 
which  payment  is  made  to  the  actor,  preacher,  teacher,  or 
singer.  And,  by  the  way,  all  efforts  or  processes  are 
oconomicall}'  productive  for  which  a  price  is  so  paid  or  whicli, 
directly  or  indirectly,  enhance  the  price.  But  more  of  this 
later  —  grievously  more. 

1  It  has  been  the  purpose  of  this  chapter  to  exhibit  the 
present  economic  system  as  one  of  private  gain  in  terms  of 
price,  of  private  property,  and  of  production  for  sale  in  a 
price  market  —  a  system  in  which  success  or  failure  presents 
itself  as  a  computation  of  price  income  against  price  outgo ; 
to  show  that  private  property  is  in  the  main  a  modern  phe- 
nomenon —  an  institution  that  has  already  greatly  changed, 
is  undergoing  constant  change,  and  that  conceivably  may 
some  day  disappear ;  to  deny  that  there  is  anything  neces- 
sarily fixed  or  fundamental  in  the  price  system  or  in  so-called 
economic  laws,  other  than  such  fixity  as  may  attach  to  the 
environment  and  to  the  character  capacities  and  needs  of 
human  beings ;  but  nevertheless  to  make  clear  that  the  task 
before  us  is  the  study  of  the  situation  as  it  actually  is,  with 
small  attention  to  its  genesis,  excepting  so  far  as  its  past 
may  throw  light  on  its  present,  and  entirely  without  atten- 
tion to  conjectural  or  probable  future  modifications ;  and 
finally  and  especially  to  emphasize  the  w^aming  that  this 
conscious  delimitation  of  our  field  and  our  problem  must 
not  imply  either  permanence  or  impermanence,  merit  or 
demerit  in  the  tilings  that  we  study. 

The  chapter  to  follow  will  show  that  the  key  to  the  under- 
standing of  the  various  problems  of  the  competitive  price 
regime  is  the  theory  of  price  itself ;  that  wages,  rents, 
interest,  and  all  other  economic  incomes  and  compensations 
are  price  facts,  and  appeal  for  their  explanation  to  an  analysis 
of  the  general  principles  of  price ;  that,  in  its  theoretical 
aspects,  the  science  of  Economics  is,  indeed,  but  little  more 
than  a  study  of  price  and  of  its  causes  and  its  corollaries ; 
that  the  various  costs  in  the  production  of  commodities  are 
items  of  price;  that  each  good  produced  is  commonly  and 
typically  the  joint  product  of  various  cooperating  factors,  is 
subjected  to  the  price  appraisal,  and  is  significant  as  a  prod- 


COMPETITIVE  ECONOMICS  27 

uct  only  in  the  degree  of  its  commanding  a  price ;  and  that 
the  process  of  apportioning  a  joint  product  of  price  among 
the  producers  of  it  —  the  great  distributive  problem  — 
resolves  itself  into  a  series  of  subordinate  or  collateral  prob- 
lems of  price;  that  none  of  these  problems  is  ethical  in' 
nature ;  that  the  economist's  business  —  as  economist  — 
is  not  the  formulation  of  moral  standards  or  the  making  of 
moral  appraisals.  And,  finally,  it  will  again  be  emphasized 
that,  as  there  is  nothing  necessarily  permanent  in  the  facts 
with  which  the  economist  has  to  do,  or  in  the  economic 
system  under  which  these  facts  are  organized,  so  there  is 
nothing  necessarily  ultimate  or  enduring  in  the  science 
which  treats  of  these  facts ;  that  its  generalizations  hold 
only  relatively  to  the  facts  which  it  discusses ;  but  that 
nevertheless  some  few  of  its  generalizations  must  seemingly 
hold  for  all  of  the  different  possible  forms  and  conditions  of 
organization. 


CHAPTER  III 

THE   REGIME    OF   PRICE  —  Continued 

Price  the  pivot  of  industry  and  business.  —  We  have  seen 

that  precisely  because  the  present  economic  Hfe  is- organized 
upon  lines  of  private  property,  of  pursuit  of  individual  gain, 
and  of  production  for  exchange,  it  is  inevitable  that  the  cen- 
ter about  which  all  economic  activity  revolves  is  the  medium 
of  exchange,  the  price  standard.  It  is  this  fact  which  in 
turns  fixes  the  problem  of  price  as  the  central  problem  and 
the  organizing  interest  of  current  political  economy  as  a 
science.  The  proof  of  this  is,  however,  mostly  to  be  found 
in  that  constant  return  to  the  price  problem  which  we  shall 
find  inevitable  as  we  approach,  one  after  another,  the  subor- 
dinate problems  of  the  science.  And  these  problems  will, 
in  turn,  declare  their  subordinate  character  by  this  very  fact 
that  they  are  only  to  be  solved  by  an  appeal  to  the  analysis 
and  the  laws  of  price.  In  the  fact  that  anything  sells  at  all 
in  the  present  economic  order  is  implied  its  sale  in  terms  of 
price.  Wages,  for  example,  are  the  price  of  the  services  of 
employed  labor ;  profit,  the  price  reward  of  the  independent, 
self-employed  laborer  (the  entrepreneur,  enterpriser;  Unter- 
nehmer,  or  imprenditor) ;  rent,  the  price  commanded  by 
property  lent  in  time  for  hire ;  interest,  the  per  cent  which 
the  time  use  of  wealth,  in  terms  of  price,  bears  to  the  total 
price.  Each  of  these  is  a  price  quantity  or  item,  and  each 
presents  itself  specifically  as  a  problem  of  price  adjustment. 
Price  the  pivot  of  distribution.  —  And  still  further :  All 
distribution  takes  place  as  a  price  process.  Each  particular 
product  is  a  price  item  and  is  due  to  the  joint  employment  of 
different  human  agents  and  of  a  wide  range  of  instrumental 
or  property  items  —  land,  machines,  raw  materials,  patents, 
franchises,  and  the  like.     The  price  of  the  joint  product  — 

28 


COMPETITIVE  ECONOMICS  29 

not  the  product  as  such  —  is  the  amount  which  is  to  be  divided, 
distributed,  among  the  various  cooperating  factors ;  and  each 
of  these  factors,  as  we  have  seen,  receives  its  distributive 
share  as  a  price  quantum.  Not  only,  then,  are  the  forces 
and  processes  under  which  and  by  which  the  sale  price  of 
the  product  is  adjusted  and  determined  to  be  studied  as 
particular  problems  in  the  theory  of  price,  but  also  the  dif- 
ferent distributive  shares  derived  from  it  are  equally  price 
problems.  Many  economists,  it  is  true,  contend  that  the 
price  of  the  final  product,  of  the  consumable  good,  must 
be  regarded  as  the  cause  of  the  distributed  price  shares. 
Other  economists  insist  that  the  payments  made  for  the 
labor,  the  instruments,  etc.,  —  price  items,  —  are,  as  costs 
of  production,  the  causes  of  the  value  of  the  jointly  produced 
price  product.  To  which  view,  if  with  either,  the  truth  is 
accurately  to  be  ascribed,  we  need  not  now  debate ;  it  is 
enough  to  note  that  this  is  an  issue  to  be  solved  only  as  a 
problem  in  the  theory  of  price.  Costs,  products,  and  distribu- 
tive shares  are  price  facts  and  are  somehow  related ;  and 
this  relation  is  a  relation  of  one  class  of  price  items  to  an- 
other class  of  price  items. 

The  science  of  economics  and  the  art.  —  It  must,  however,  still 
be  held  in  mind  that,  in  a  society  differently  organized  in  its  eco- 
nomic life,  the  central  problem  of  political  economy  and  the  deriva- 
tive and  surrounding  problems  might  be  quite  different.  Our  classi- 
fications and  generalizations  and  principles  and  laws  must  be 
constructed  and  formulated  to  fit  the  needs  of  an  analysis  of  a  com- 
petitive, entrepreneur,  private-gain,  and  private-profit  society,  in 
which  production  is  prevailingly  and  typically  production  for  ex- 
change, and  in  which  in  turn  exchanges  take  place  through  money  as 
an  intermediate.  Our  explanations  will  best  run  in  terms  of  the 
process  as  it  actually  takes  place.  We  ask  not  primarily  what  ought . 
to  be,  but  what  is.  We  are  —  in  the  first  instance,  at  any  rate,  and 
as  economists  —  set  to  search  out  the  objective  facts,  to  analyze  and 
synthesize  and  generalize  these  facts  and  their  sequences  and  their 
processes.  At  this  stage  of  the  study  —  the  science  of  it  rather 
than  the  art  —  our  business  is  not  to  approve  or  to  condemn,  to 
regret  or  to  indorse,  to  commend  or  to  denounce,  but  only  to  make  a 
coldly  unsympathetic,  impersonal,  and  objective  report  of  the  actual 
ongoing  of  things.     Defense,  apology,  or    condemnation   are  no 


30  THE  ECONOMICS  OF  ENTERPRISE 

part  of  our  business.  After  we  have  learned  what  \vc  can  of  the  facts 
—  but  not  till  then  —  will  the  time  have  arrived  for  passing  judg- 
ments of  approval  or  of  disapproval.  Then  may  the  results  of  our 
work  be  handed  over  to  the  social  philosophers;  or  we  ourselves, 
Heaven  so  willing,  may  assume  this  r61e  and  may  undertake  the 
task  of  philosophical  or  ethical  or  sociological  appraisal.  As  the 
final  step  of  it  all,  we  may,  perhaps,  be  able  to  decide  what  things 
are  good  in  all  this  vain  life  of  shadows,  and  may  come  to  approve  or 
to  condemn,  may  recommend,  may  set  ourselves  to  modify,  amend, 
abandon,  substitute.  But  the  economist,  as  such,  has  no  criteria 
b}'  wliich  to  test  the  worth  of  what  he  finds.  As  economist,  his 
business  is  solely  with  the  facts :  Trojan  and  Tyrian  stand  in  equal 
estimation  with  him.  For  close  thinking,  science  and  art  must  be 
kept  separate  —  the  "  world  of  description  "  from  the  "  world  of 
appreciation  "  —  facts  from  appraisals.  This  is,  to  be  sure,  a  scien- 
tific ideal,  rarely  attained,  and  ^^olated  especially  often  in  the  social 
sciences  —  measurabl}'  often  also  in  the  present  book  —  but  violated 
always  at  some  hazard  to  scientific  truth. 

Economic  doctrines  valid  only  in  appropriate  conditions.  —  As 
part,  then,  of  this  clear  thinking,  it  is  necessary  to  recognize  not 
only  that  the  social  organization  might  be  very  different  from  the 
present,  has  been  so  different,  and  will  probablj'  wdth  passing  cen- 
turies again  and  again  become  different  in  many  diverse  ways,  but 
also  that  the  economic  doctrines  valid  and  adequate  for  existing 
society  must,  perforce,  in  other  conditions  fail  of  adequacj'-,  as  these 
conditions  may  be  fundamentally  different.  Not  that  each  decade 
or  each  century  had  its  separate  sj'stem  of  classifications  and  general- 
izations and  principles  :  this  is  not  necessarily  true  —  can,  indeed,  be 
true  only  so  far  as  the  fundamentals  of  human  Ufe  may  change. 
Alost  of  what  is  valid  now  in  economic  analysis  wiU  continue  to  be 
valid  so  long  as  our  society  remains  a  society  of  private  profit, 
individual  gain,  and  production  for  the  price  market  —  will  remain 
vahd  that  is,  in  such  fields  of  our  economic  life  as  retain  these  char- 
acteristics, and  in  the  degree  of  their  retention.  Even  with  the  pres- 
ent national  post  and  with  the  possible  state  or  national  railroads, 
some  share  of  the  economics  of  competitive  production  holds  good, 
since  these  pubhc  activities  buy  their  labor  and  supplies  in  the  open 
market  and  sell  their  services  at  a  price. 

But  any  of  the  other  possible  radically  different  tj'pes  of  or- 
ganization would  necessarily  have  its  corresponding  different 
central  problem.  All  science  is  essentialh^  pragmatic :  its  prob- 
lems organize  its  tliinking.  Thus,  definitions  and  classifications 
are  good  or  bad  according  to  the  purpose  of  the  particular  in- 


COMPETITIVE  ECONOMICS  31 

vestigation  in  hand.  Precisely,  however,  for  this  reason  they  are 
not  arbitrary. 

Thus  if  one  were  to  ask  how  much  of  current  economics  would  be 
valid  for  a  systematic  socialism,  —  it  being  assumed  that  socialism 
means  a  common  partnership  in  the  implements  of  production 
(social  capital),  the  operation  of  these  for  common  account,  with 
some  sort  of  administrative  division  of  the  aggregate  consumable 
product,  —  it  must  be  admitted  that  the  salient  features  of  our 
competitive  price  economics  would  disappear.  What  might  be  the 
theoretical  economics  of  socialism  it  is  difficult  to  formulate.  Money 
and  price  would  seemingly  have  no  place  —  at  least  no  necessary 
and  central  place.  Exchanges,  if  any  remained,  would  be  merely 
incidental  and  sporadic,  or  occasional,  and,  in  any  case,  non-essen- 
tial. On  the  one  side,  economics  would  shade  off  into  administra- 
tive theory,  a  sort  of  political  science.  Seemingly,  however,  its 
central  and  unifying  problem  would  be  that  of  utility  rather  than  of 
market  value  or  price.  And  it  is  even  more  difficult  to  surmise  what 
might  be  the  science  of  economics  for  ants  or  bees  or  peccaries  — 
their  wirtschaftliches  Leben.  But  something  of  the  sort  there  might 
reasonably  be,  must  indeed  inevitably  be,  were  there  intelligence  to 
construct  the  scientific  generalizations.  Likewise  the  aspirations 
now  called  Home  Economics  and  Agricultural  Economics  have  in 
them  the  possibilities  of  real  sciences.  So,  also,  doubtless,  of 
Sociology. 

Nevertheless  —  and  this  is  the  immediate  goal  of  the  argument  — 
much  that  belongs  to  any  human  economic  system  must  be  common 
to  all  systems  that  are  human.  There  will,  for  example,  always 
remain  the  fundamental  fact  of  human  need  and  desire ;  there  will 
always  remain  the  dependence  of  aggregate  consumption  on  aggre- 
gate production ;  and  there  will  always  remain  the  twofold  depend- 
ence of  aggregate  production  upon  the  efficiency  of  man  and  upon 
the  quantity  and  quality  of  his  instrumental  equipment. 

To  summarize :  The  competitive  economy  is  an  exchange 
economy,  and  therefore  a  price  economy.  Production 
takes  place  typically  for  the  purposes  of  sale.  Gain,  there- 
fore, is  sought  in  terms  of  price,  and  accrues  in  terms  of 
price :  All  economic  purposes  and  methods  take  on  the  price 
emphasis.  Price  becomes  the  central  and  pivotal  fact  in 
all  industry  and  business.  The  theory  of  price  is  thus  the 
core  of  all  economic  theory ;  the  rest  is  corollary  or  appli- 
cation. Thus  price  presents  itself  in  the  competitive  order 
as  the  unifying  and  organizing  interest  and  problem  of  the 


32  THE  ECONOMICS  OF  ENTERPRISE 

scionoo,  the  point  of  view  with  reference  to  which  the  eco- 
nomic field  is  delimited  and  its  horizons  fixed. 

It  will  be  the  task  of  the  next  chapter  to  bring  into  clear 
view  that  fundamental  fact  or  force  which,  in  the  competitive 
order,  imposes  the  necessity  of  trade ;  makes  imperative 
the  existence  of  a  medimn  of  exchange  ;  stamps  the  competi- 
tive r6gime  as  inevitably  a  price  regime,  and  organizes  all 
economic  activity  about  the  medium  of  exchange  through 
which  the  exchanges  take  place.  The  ultimate  and  directive 
fact  in  the  case  will  be  shown  to  be  the  specialization  of 
economic  functions,  —  what  is  sometimes  called  the  divi- 
sion of  labor,  —  the  assignment  of  productive  activity  to 
capacity  and  to  favoring  opportunity.  Trade  is  merely  the 
competitive  method  by  which  the  attendant  advantages  are 
secured.  But  it  will  also  be  made  clear  that  neither  in  im- 
portance nor  in  attainability  are  these  advantages  peculiar 
to  the  competitive  regime.  Other  types  of  organization 
might  offer  the  same  advantages,  obtaining  them,  however, 
by  different  methods.  Trade  and  monej^  are  merely  ad- 
justments for  making  specialization  of  function  possible  in 
a  competitive  society.  Trade  and  money  are  thereby  the 
characteristic  traits  of  the  actual  economic  order ;  and  money 
is  the  pivotal  fact  in  trade. 


CHAPTER  IV 

SPECIALIZATION  AND  TRADE  RELATED  TO  MONEY 

Specialization,  interdependence,  and  efficiency.  —  The 
forms  of  life  of  very  simple  structure  rank  as  the  lower  orders, 
not  because  complexity  is  in  its  nature  preferable  to  simplicity, 
—  for  with  many  things  the  contrary  is  the  truth,  —  but 
because  with  the  higher  forms  of  life  a  greater  efficiency  goes 
with  increasing  complexity.  The  single-celled  organisms 
are  all  mouth  for  purposes  of  ingesting  food  and  all  stomach 
for  purposes  of  digesting ;  they  are  all  locomotive  apparatus 
for  purposes  of  moving,  all  reproductive  apparatus  for  pur- 
poses of  multiplication,  all  sensory  apparatus  for  the  receipt 
of  stimulation.  Lacking  specialized  parts  and  functions, 
the  correspondence  to  environment  is  limited  in  extent  and 
defective  in  land.  Only  the  simpler  and  more  commonplace 
adaptations  are  possible.  Emergencies  fail  of  appropriate 
provision.  With  greater  specialization  of  function  goes 
greater  effectiveness  of  function,  an  ability  to  take  advantage 
of  a  wider  range  of  facts  in  the  environment  and  to  adjust 
to  a  wider  range  of  emergencies.  Efficiency  for  the  purposes 
of  life  grows  with  the  development  of  special  organs  and 
special  adjustments  for  the  accomplishment  of  special 
things.  In  the  selective  process,  increasing  specialization 
means  increasing  advantage  in  the  struggle  for  life. 

This  law  of  development  by  specialization  is  widely  illustrated 
in  many  fields  of  life  and  on  many  levels.  Nor  are  illustrations  and 
analogies  lacking  outside  of  the  biological  field  :  in  astronomy,  in  the 
slow  emergence  of  suns  and  planets  and  satellites,  each  with  a  defi- 
nite path  and  specific  share  in  the  maintenance  of  this  stupendous 
moving  equihbrium ;  in  history,  in  the  formation  of  castes  and 
classes;  in  political  science,  in  the  subdivision  of  the  primitive 
king-function  of  priest,  judge,  war  chief,  and  executive  into  the 
various  functions  of  parliaments,  courts,  field  marshals,  and  ad- 
D  33 


34  THE  ECONOMICS  OF  ENTERPRISE 

ministrativo  bureaus;  in  lin<2;uistics,  in  the  slow  differentiation  of 
the  amorphous  yelii  or  chick  or  f;runt  —  the  exchimation,  speech 
without  parts,  woril  jM-otophisni,  so  to  speak  —  into  the  various 
specialized,  cooperating  functions  together  making  up  the  sentence. 

But  perhaps  the  best  illustrations  of  this  principle  of  spe- 
cialization of  function  —  illustrations  which  are  particularly 
to  the  present  purpose  —  are  to  be  found  in  the  field  of  po- 
litical economy.  To  understand  the  necessity  of  a  medium 
of  exchange,  a  money,  in  human  affairs,  we  must  under- 
stand the  importance  of  trade.  To  measure  the  impor- 
tance of  trade,  we  must  appreciate  the  significance  of  spe- 
cialized activities.  To  this  end,  we  must  realize  that  men  in 
society  are  interdependent,  and  that  they  are  in  society 
precisely  because  they  are  by  nature  interdependent,  there 
being  no  welfare  for  any  individual  but  in  association  with 
his  fellows.  We  must  understand  also  that  it  is  only  through 
the  specialization  of  economic  functions  that  this  inter- 
dependence can  assume  the  guise  of  a  surpassing  good  fortune. 
So  much  having  been  made  clear,  the  next  step  will  be  to  rec- 
ognize that,  in  actual  society,  the  possibility  of  specialization 
not  only  makes  necessary  the  institution  of  trade  but  also 
depends  on  that  institution.  And  finally  it  must  be  made 
clear  that  trade,  to  be  really  practicable,  requires  and  assumes 
an  exchange  medium,  an  intermediate  in  trade,  a  money. 
And  having  by  these  separate  steps  arrived  at  our  argu- 
mentative goal,  we  shall  so  far  be  prepared  to  realize  the 
ultimate  nature  of  the  price  regime  in  which  we  live,  the 
forces  behind  it,  the  significance  of  it,  and,  in  some  small 
part,  the  manner  of  its  functioning. 

Isolation  imposes  inefficiency.  —  The  lot  of  the  pioneer  is 
necessarily  a  hard  one.  Unable  to  trade,  and  therefore 
unable  to  specialize  his  activities,  he  is  compelled  to  be  in- 
efficient. The  new  continent,  with  its  wealth  of  new  re- 
sources, its  expanse  of  unexhausted  lands,  its  store  of  un- 
cared-for fruits,  its  teeming  life  for  sport  and  food,  may  seem 
to  assure  to  him  a  position  of  ease  and  plenty.  The  wide 
ranges  of  land  do  not,  it  is  true,  offer  unlimited  opportunities 
and  bounties,  but,  in  comparison  with  his  necessities,  the 


SPECIALIZATION,    TRADE,    MONEY  35 

supply  far  outruns  the  need.  But,  though  he  obtains  his 
food  easily,  it  is  only  during  a  part  of  the  year.  He  needs 
also  to  harvest  and  to  store.  He  must  have  shelter.  After 
a  fashion,  of  course,  he  may  be  his  own  carpenter,  smith, 
shoemaker,  weaver,  and  tailor.  But  even  so,  there  will 
remain  the  need  of  hunting  appliances,  and  of  powder  and 
ball.  Shorn  of  all  that  he  brought  with  him  and  cut  off  from 
all  touch  with  his  fellows,  the  existence  of  the  pioneer  would 
be  well-nigh  impossible.  At  the  best,  even  though  his  food 
lacked  nothing  in  volume,  it  must  be  grievously  restricted  in 
variety.  Most  things  he  must  get  along  without  —  the  prod- 
ucts of  distant  lands,  and  all  those  goods  dependent  for  their 
production  on  extended  manufacturing  plants  with  their 
costly  equipment,  their  multitudes  of  employees,  and  all 
their  various  but  concurrent  lines  of  skill.  No  man  is,  in 
fact,  sufficient  for  his  own  needs  in  any  adequate  measure. 
Fortunately  for  humanity,  men  depend  for  their  welfare 
mostly  upon  one  another.  One  must  live  among  his  fellows 
or  must  suffer.  Too  sparsely  inhabited  countries  are  never 
prosperous.  That  costly  thing,  transportation,  absorbs 
overmuch  of  their  resources. 

In  the  larger  part,  therefore,  the  productive  abilities  of 
the  isolated  man  are  wasted.  Men  in  society  differ  as 
widely  in  aptitudes  for  production  as  do  zones  and  continents 
in  natural  resources.  Unless  each  man  in  society  specializes 
in  productive  activity,  the  wastes  of  productive  power  must 
be  no  less  than  would  attend  his  isolated  state.  For  pro- 
ductive purposes,  indeed,  each  man  would  still  be  isolated. 
That  one  thing,  or  those  few  things,  that  he  could  do  well 
he  must  not  do.  Much  he  must  do  that  he  would  far  better 
let  others  do  for  him.  Jack  at  all  trades,  he  is  necessarily 
master  of  none.  His  own  welfare,  therefore,  and  the  wel- 
fare of  his  fellows  demand  that  each  member  of  the  society 
follow  the  line  of  his  especial  aptitude  so  far,  of  course,  as 
his  activity  is  socially  useful.  Each  then  produces  a  surplus 
of  his  peculiar  product ;  a  surplus  which  he  can  exchange 
for  the  surplus  of  others.  Thereby  a  larger  product  accrues 
to  society  as  a  whole  and  a  larger  total  of  consumable  goods 
to  each  individual  member  of  society. 


30  THE  ECONOMICS  OF  ENTERPRISE 

Specialization  and  industrial  organization.  —  This  is  the 
priiu'iplc  and  the  inctluxl  of  what  is  known  as  tlio  division  of 
hd)or,  speciuUzed  prochiction,  working  out  into  a  wide  variety 
of  trades  and  professions,  and  into  the  minute  subdivisions 
of  processes,  the  complicated  organization,  and  the  vastly 
cheapened  processes  of  the  great  factories.  Even  in  the 
day  of  Adam  Smith,  a  century  and  a  half  ago,  the  making 
of  a  pin  involved  eighteen  distinct  operations,  each  requir- 
ing its  different  specialized  laborers. 

This  wide  specialization  of  industrial  functions  involves, 
it  is  evident,  an  extreme  dependence  of  each  producer  upon 
his  fellows.  The  shoemaker  would  starve  without  the  farmer 
and  freeze  without  the  carpenter  and  the  tailor.  In  some 
of  its  activities,  our  present  system  is  therefore  a  system  of 
unconscious,  but  widespread  and  effective,  cooperation. 

Competitive  specialization  requires  money.  —  It  should 
now  be  clear  that  in  the  economic  life,  as  in  biology  or  as- 
tronomy, specialization,  interdependence  and  cooperation 
are  merely  different  phases  or  aspects  of  one  process  —  a 
process  involving  a  redistribution  of  functions  in  production 
and  making  possible  an  enormous  increase  in  the  aggregate 
of  products,  requiring  therewith  —  in  the  competitive  system 
—  an  exchange  of  products  between  individuals,  and  making 
almost  imperative  the  use  of  a  common  medium  of  exchange. 
The  entire  process,  in  each  of  its  different  aspects,  is,  indeed, 
one  among  many  illustrations  of  the  intellectual  adaptation 
of  each  man  to  his  environment. 

Regional  specialization  and  trade.  —  Nor  are  the  advan- 
tages of  specialized  economic  functions  limited  to  the  rela- 
tions between  individuals  in  the  same  society.  They  are 
equally  manifest  in  the  relations  of  nations  or  societies  to 
one  another.  Division  of  labor  takes  place  between  countries 
and  zones.  International  specialization  involves  and  illus- 
trates the  economic  interdependence  of  societies  and  is 
conditioned  on  the  possibility  of  international  trade.  Pre- 
cisely as  with  specialization  among  individuals,  interdepend- 
ence and  specialization  must  go  together  and  must  achieve 
their  advantages  through  trade.  To  place  obstacles  in 
the  way  of  any  one  is  to  interfere  with  the  others  and  to 


SPECIALIZATION,    TRADE,   MONEY  37 

forego  the  advantages  which  together  they  offer.  Through 
trade  each  country  and  zone  shares  in  the  products  and  the 
good  fortune  of  every  other.  And  between  countries, 
as  between  individuals  in  any  country,  these  advantages 
are  more  easily  achieved  with  every  improvement  in  trans- 
portation and  are  achieved  in  ever  larger  measure.  To  re- 
strict trade  is  parallel  to  making  transportation  more  diffi- 
cult ;  it  is  to  interfere  with  the  international  specialization 
of  economic  activity. 

Only  competitive  specialization  requires  trade  and  money. 
—  It  should  now  be  obvious  that  the  advantages  of  special- 
ized production  are  not  peculiar  to  the  competitive  organiza- 
tion of  society.  They  might  be  equally  great  in  any  other 
economic  order.  A  slave  or  a  feudal  economy  or  any  pos- 
sible cooperative  or  socialistic  society  would  find  equally 
imperative  the  organization  of  its  productive  power  into 
specialized  activities.  Possibly  also,  some  other  form  of 
organization  than  the  present  may  some  day  prove  to  be  a 
better  way  of  working  out  this  problem  of  specialization. 
Trade  is,  at  any  rate,  only  one  of  the  possible  ways,  and 
among  the  different  possible  ways  may  not  be  the  best.  It 
is,  in  fact,  not  the  specialization  of  functions,  but  only  the 
competitive  manner  of  organizing  this  specialization,  that 
imposes  the  necessity  of  trading.  Trade  is  the  competitive 
way  of  making  specialization  possible.  But  trade  is  purely 
a  competitive  phenomenon,  a  mere  adjustment,  important 
only  in  the  competitive  order,  though  in  this  order  char- 
acteristic and  central.  Accurately,  indeed,  trade  is  not 
something  permitted  by  competition  or  imposed  by  it  or 
derived  from  it :  it  is  competition,  the  heart  of  it,  its  central 
characteristic  fact.  It  follows  that  it  is  trade  and  not  spe- 
cialization that  implies  and  imposes  the  practical  necessity 
of  money.  Any  intelligently  ordered  society  will  have  the 
specialization ;  it  is  only  the  competitive  society  that  re- 
quires also  the  trade  and  the  money.  It  is  upon  trade  that, 
in  a  competitive  society,  all  the  advantages  offered  by  spe- 
cialization depend.  And  trade  demands  a  medium  for  its 
transaction,  a  money.  Once  there  is  the  money,  society  is 
in  the  regime  of  price. 


38  THE  ECONOMICS  OF  ENTERPRISE 

Barter  and  exchange  media.  —  Doubtless  there  are  evils 
enough,  both  incidental  and  intrinsic,  attendant  upon  the 
regime  of  price,  the  pecuniary  organization  of  society. 
But  so,  also,  are  the  benefits  great.  It  is  peculiar  to  the 
competitive  society  merely  that  it  resorts  to  trading  rather 
than  to  seek  the  solution  of  its  problem  through  the  dis- 
tribution of  its  product  by  lot  or  by  other  administrative 
device  or  decree.  A  competitive  society  must  perforce  be 
a  pecuniary  society,  or  must  forfeit  the  measureless  advan- 
tages of  its  automatic  cooperations  in  the  great  give  and  take 
of  trade.  To  forego  the  use  of  money  would  be  to  revert  to 
the  system  of  barter.  In  no  essential  way,  however,  would 
this  modify  or  palliate  the  existing  situation,  but  would 
merely  increase  the  difficulty  and  the  friction  of  it. 

Nor,  in  the  last  analysis,  would  the  system  of  barter  mean 
the  absence  of  a  medium  of  exchange,  but  merely  the  multi- 
plication of  media.  Value  relations  would  exist  as  at  pres- 
ent, but  no  price  system  — ■  that  is,  no  one  medium  of 
exchange.  Instead,  there  would  be  an  indefinite  multiplica- 
tion of  media.  The  possessor  of  any  particular  good  for 
sale  would  rarely  come  upon  a  man  having  the  wanted  thing 
and  wanting  the  offered  thing.  Thus,  by  trading  and  re- 
trading,  possessors  of  commodities  which  they  desired  to 
exchange  would  finally  acquire  command  of  the  particular 
commodities  exchangeable  against  the  particular  commodity 
desired.  That  is  to  say,  each  man  would,  as  his  necessities 
should  dictate,  be  employing  a  medium  of  exchange,  an 
intermediate  between  the  wares  for  sale  and  the  commodities 
desired  by  him ;  but  this  intermediate  would  be  for  different 
men,  and  for  each  man  at  different  times,  a  different  medium. 
A  money  economy  has  established  itself  only  when  one  com- 
modity has  been  conventionally  specialized  to  serve  as  the 
common  intermediate  of  exchange  and  so  as  the  common 
standard  of  value. 

Goods  as  demand  for  one  another.  —  But,  evidently,  in 
the  absence  of  money  the  demand  for  any  particular  good 
must  always  be  made  up  of  the  offer  of  other  goods.  Goods 
would  furnish  the  demand  for  goods.  The  exchange  process 
would   establish   value   relations,   but  not   price   relations. 


SPECIALIZATION,   TRADE,   MONEY  39 

The  more  goods  of  each  sort,  the  more  demand  for  goods  of 
other  sorts.  All  demands  and  all  supplies  would  be  embraced 
within  the  total  of  product.  Supply  of  some  goods  would 
function  as  demand  for  other  goods.  Total  supply  of  prod- 
ucts and  total  demand  for  products  would  be  merely  different 
ways  of  looking  at  the  total  of  products.  Viewed  in  this 
large  way,  then,  aggregate  demand  and  supply  are  one  and 
the  same  thing,  — ■  the  social  dividend. 

The  money  demand  for  any  one  good.  —  In  the  money 
economy  the  facts  remain  essentially  the  same,  but  become 
more  manageable.  There  are  many  different  possessors  of 
many  different  sorts  of  goods,  each  of  whom,  we  will  say,  is 
disposed  to  replace  some  particular  item  of  his  goods  with 
a  hat.  But  no  one  of  all  these  various  possessors  of  goods 
is  likely  to  look  for  a  man  with  hats  to  trade.  Nor,  if  he 
looked,  would  he  be  likely  to  find  any  man  having  hats  and 
desiring  the  particular  thing  offered  for  them.  All  the  men 
demanding  hats  will,  therefore,  as  the  first  step  in  the  ex- 
change process,  translate  some  part  of  their  holding  of  goods 
into  a  holding  of  money.  The  various  unhomogeneous  com- 
modity demands  for  hats  will  thereupon  have  coalesced  into 
a  homogeneous  money  demand.  Only  price  offers,  not  offers 
of  goods,  are  to  be  set  over  as  demand  against  the  supply  of 
hats.  The  market  price  of  hats  —  the  value  of  hats  in  terms 
of  the  money  commodity —  is  the  adjustment  point  between 
these  money  demands  for  hats  and  the  supply  of  hats.  The 
supply  of  hats  is  also  presented  in  money  terms — is  essentially 
a  demand  for  money  on  the  part  of  the  owners  of  the  hats. 

And  precisely  so  with  any  other  commodity  that  arrives 
at  its  market  standing  in  terms  of  price.  Doubtless  other 
value  relations  exist,  —  corn  to  cloth,  wheat  to  shoes,  horses 
to  corn,  corn  to  shoes,  —  but  each  of  these  commodities 
attains  directly  to  its  market  standing  through  the  process 
by  which  it  is  awarded  its  money  price.  The  value  rela- 
tions between  the  different  commodities  are  thus  arrived 
at  through  comparison  of  their  prices.  The  direct  setting 
of  the  different  commodities  over  against  one  another  for 
value  adjustment  is  possible,  of  course,  but  rarely  occurs; 
barter  is  uncommon. 


40  THE  ECONOMICS  OF  ENTERPRISE 

It  is  not,  liowt'vcM-,  to  ho  iiiforroil  that  nccossaril.y,  or  even  perhaps 
ooniinonly,  whim  men  market  their  jj;oods  afi;ainst  money,  there  is  a 
distinct  and  definite  purpose  to  aj^ply  the  selhng  price  to  any  specific 
line  of  purcliase,  hats  or  other.  One  often  sells  his  goods  for  money 
in  the  belief  merely  that  the  money  obtained  will,  earlier  or  later, 
buy  for  him  an  indefinite  something  more  to  his  purpose  than  the 
thing  he  sells. 

Nor  is  it  to  be  inferred  that  the  possession  of  money  is  necessarily 
due  to  the  sale  of  some  article  previously  possessed  by  him  who  has 
the  money,  or  by  anj^  one  else.  The  money  may  have  been  given 
him  ;  or  he  may  have  inherited  it ;  or  have  obtained  it  by  a  pension, 
or  by  gambling,  or  by  stealing.  It  is  to  the  present  purpose  merely 
that  he  has  it. 

Nor,  in  fact,  need  his  holding  of  purchasing  power  be  necessarily 
in  the  form  of  actual  tangible  money.  One  often  has  a  money 
credit  at  the  bank  against  which  one  draws  his  check.  Nevertheless, 
the  credit  is  something  that  runs  in  terms  of  money,  is  equivalent  to 
money,  and  functions  as  a  money  demand  in  the  market  process  by 
which  the  price  is  adjusted.  And  this  is  sufficient  for  the  present 
purpose;  for  the  time  being  we  shall  treat  this  credit  as  actual 
mone3^ 

The  examination  so  far  made  of  the  competitive  system, 
the  regime  of  price,  has  already  sufficed  to  show  that,  even 
under  competitive  conditions  and,  indeed,  by  the  very  nature 
of  these  conditions,  men  are  essentially  cooperative  and  inter- 
dependent in  their  productive  activities ;  that  their  antago- 
nisms attach  solely  to  the  price  aspects  of  the  competitive 
system,  its  trading  process,  and  manifest  themselves  in  the 
effort  to  obtain  through  trading  the  most  possible  for  the  least 
possible ;  that  precisely  as  specialization  in  a  competitive 
society  creates  the  need  to  trade,  so  the  possibility  of  trade 
is  the  permit  to  specialize,  trade  and  speculation  being,  there- 
fore, mutually  conditioning  facts ;  that  actually,  even  if  not 
by  imperative  necessity,  trade  requires  and  imposes  the 
empIo>Tnent  of  money ;  and,  finally,  that  all  the  demands  for 
any  particular  thing  on  the  part  of  the  various  possessors  of 
other  things  present  themselves  as  sums  of  money  offered  for 
the  particular  thing;  demand,  in  the  money  economy,  is 
mone}^  demand. 

The  topic,  then,  which  is  next  to  require  our  attention  is 
the  process  by  which  the  supply  of  any  given  good  is  equated 
against  the  money  demand  for  that  good  at  the  point  of  ad- 


SPECIALIZATION,   TRADE,   MONEY  41 

iustment  termed  the  market  price.  What  is  the  relation  of 
the  quantity  of  the  supply  to  the  price  ?  What  the  relation 
of  the  various  prices  which  the  different  holders  demand  tor 
their  goods  ?  What  the  relation  of  the  usefulness  of  a  good 
to  the  prices  which  different  men  will  pay  for  it,  the  different 
demands  ?  And  what  is  the  relation  of  these  different  de- 
mands to  the  price  ? 


CHAPTER  V 

THE    ADJUSTMENT    OF    PRICE 

Price-making  as  the  outsider  sees  it.  —  An  onlooker  at 
an  auction,  or  a  visitor  at  the  Stock  Exchange  or  the  Board 
of  Trade,  would  observe  that  there  are  present  both  bidders 
for  goods  and  offerers  of  goods,  and  that  the  trades  or  sales 
take  place  at  a  price  which  is  agreed  on  in  the  process.  He 
would  further  note  that  if,  on  the  Board  of  Trade,  the  selling 
side  of  the  market  is  offering  more  supply  than  the  buying 
side  is  willing  to  take  at  the  ruling  quotations,  the  prices 
will  go  down.  If,  on  the  other  hand,  the  buying  orders  are 
coming  in  relatively  fast,  they  will  probably  be  found  impos- 
sible of  execution  without  forcing  the  prices  up.  On  days 
of  an  active  market,  prices  may  rise  or  fall  often  and  sharply 
—  fluctuating  possibly  from  hour  to  hour  or  even  from  mo- 
ment to  moment.  Every  price  level  is,  for  its  particular 
time,  the  point  at  which  the  supply  and  the  demand  arrive 
at  an  equilibrium.  Doubtless  many  of  the  buyers'  orders 
have  given  authority  to  pay,  if  necessary,  a  higher  price 
than  is  actually  paid ;  and  many  of  the  sellers'  orders  have 
fixed  a  lower  limit  to  the  selling  price  than  it  has  actually 
been  necessary  to  sell  at.  But  the  onlooker  sees  none  of 
these  mere  possibilities.  He  observes  only  bids  on  one  side 
and  offers  on  the  other,  and  notes  that,  as  the  bids  are  higher, 
more  wheat  is  offered  for  sale,  or  that,  as  the  prices  rise,  some 
men  drop  out  of  the  bidding  —  and  that,  as  the  owners  are 
more  anxious  to  sell  and  find  no  buyers,  they  either  stop 
shouting  their  wares  or  accept  lower  prices.  It  is  obvious 
to  him  that  higher  prices  attract  more  sellers,  and  lower 
prices  more  buyers  —  that  more  bidders  at  the  price  make 
the  prices  higher,  and  more  sellers,  the  prices  lower.  And 
all  this  is  intelligible  to  him  without  more  knowledge  of  the 

42 


THE  ADJUSTMENT  OF  PRICE  43 

dispositions  of  either  buyers  or  sellers  than  is  manifest  from 
what  he  can  see  and  hear.  It  is  evident  that  each  selling 
broker  is  trying  to  sell  on  the  most  favorable  terms  that  he 
can  get,  and  may,  in  the  execution  of  his  orders,  shout  a 
series  of  selling  offers  that  no  one  accepts,  and  may  possibly 
before  he  actually  sells  have  several  times  lowered  his  selling 
terms.  The  buyers  also  are  trying  to  buy  as  cheaply  as 
possible,  and  may  little  by  little  bid  up  before  a  purchase 
is  closed.  Part  of  the  technique  of  trading  is  obviously  to 
offer  no  better  terms  than  are  necessary. 

What  the  outsider  may  infer.  —  The  onlooker,  however, 
observes  only  the  sellers'  offers  and  the  buyers'  bids,  and  has 
no  knowledge  of  what  other  offers  or  bids  there  may  be 
still  to  be  disclosed.  He  knows  merely  that  the  market 
price  is  the  price  at  which  are  being  equated  such  offers  of 
price  and  offers  of  goods  as  are  made,  and  that  there  are 
these  actual  demand  prices  against  other  actual  selling 
prices.  He  may,  indeed,  infer  that  what  the  different  traders 
on  either  side  have  "  up  their  sleeves  "  will  probably  deter- 
mine the  direction  of  the  next  fluctuation  in  the  market. 
But  he  sees  only  that  the  market  price  at  any  instant  is  the 
price  that  equates  the  different  demands,  at  their  respective 
prices,  with  the  offered  supplies  at  their  respective  prices. 
The  actual  price  at  any  instant  is  fixed  by  the  demand  bids 
as  they  are  and  the  supply  offers  as  they  are,  and  by  nothing 
else  —  by  the  actual  rather  than  by  the  potential  facts. 
When  the  potential  becomes  the  actual,  some  other  market 
price  may  come  to  be  the  actual  price. 

The  view  of  any  actual  trader.  —  Something  like  the  fore- 
going situation  exists  when  two  men  are  bargaining  for  the 
sale  of  a  horse.  Behind  the  observed  facts  something  like 
the  same  range  of  hidden  facts  must  be  present.  The  bids 
of  the  prospective  purchaser  are  intended  to  give  the  scanti- 
est possible  information  as  to  how  high  he  will  go ;  his  earlier 
higgling,  indeed,  will  better  indicate  how  low  he  thinks  the 
owner  of  the  horse  may  be  induced  to  sell.  Each  of  the 
traders  is  shrewd  to  mislead  the  other  as  to  his  own  limit. 

But  evidently  there  is  a  limit  —  a  point  beyond  which  the 
bidder  will  not  go  in  buying  the  horse,  as  there  is  also  a 


44  THE  ECONOMICS  OF  ENTERPRISE 

lower  limit  to  what  the  owner  will  soil  for  —  though,  often 
enough,  neither  of  thes(>  limits  may  be  precisely  and  definitely 
in  the  mintls  of  the  nvspcetive  traders.  Not  only,  then,  is 
it  true  that  neither  trader  in  the  horse  trade  knows  the  other's 
limit,  and  that  none  of  the  bidders  in  the  wheat  market 
knows  the  other's  limits,  and  that  the  observer  cannot  know 
any  of  the  limits,  but  it  is  in  addition  true  that  any  actual 
buj'er  or  seller  may  never  come  under  the  necessity  of  dc^ter- 
mining  how  high,  as  buyer,  or  how  low,  as  seller,  he  would 
if  necessary  go,  but  only  that  he  will  at  least  go  as  far  in  his 
particular  direction  as  he  finds  actually  necessary  for  his 
trade.  Limits  in  such  cases,  none  the  less,  there  inevitably 
are ;  as  such,  they  mark  the  bounds  within  which  the  trade 
must  take  place,  if  it  takes  place  at  all. 

The  economist's  view.  —  We  are  not  yet  prepared  to 
analyze  the  process  by  which  the  buyer  arrives  at  his  upper 
limit  of  demand,  his  maximum  paying  price,  or  the  process 
by  which  the  seller  determines  his  lower  limit,  his  minimum 
selling  price,  the  price  at  which  he  would  rather  retain  the 
property  than  accept  the  money.  For  the  time  being,  it 
must  suffice  to  assume  that  both  of  these  limits  exist. 

Assuming,  then,  these  limits,  the  economist  has  more  to 
do  in  analyzing  the  process  by  which  a  market  price  is  arrived 
at  than  the  mere  onlooker  at  a  trade  or  an  auction  or  a  market 
is  concerned  to  do  or  is  in  a  position  to  do.  The  observer 
looks  at  the  case  purely  from  the  outside  —  sees  it  objec- 
tively —  as  a  mere  spectacle,  and  finds  no  difficulty  in  under- 
standing it  as  mere  objective  spectacle.  Price  for  him  is 
the  actual  adjusting  point  of  the  demand  offers  on  the  one 
side  with  the  commodity  offers  on  the  other  side  —  the  equat- 
ing point  between  demand  and  supply.  The  case  is  even 
simpler  for  him  than  a  football  scrimmage  —  not  much  more 
puzzling,  indeed,  than  the  level  of  the  scales,  or  of  two  con- 
nected reservoirs  of  water,  or  the  adjustment  of  a  row  of 
marbles  in  a  tilted  dish. 

But  we,  as  economists,  have,  in  addition,  to  concern  our- 
selves with  the  psychology  of  bargaining  and  with  the  in- 
fluences that  the  different  traders'  limits  have  on  the  method 
by  which  the  market  equilibrium  is  reached  or  is  disturbed. 


THE  ADJUSTMENT  OF  PRICE  45 

For  the  purposes  of  Economics,  then,  we  go  further  than  the 
onlooker  goes  or  can  go ;  we  undertake  the  analysis  under 
the  assumption  of  a  range  of  facts  which  must  exist,  but 
which  are  not  seen  by  any  outsider  or,  in  their  totality,  by 
any  one  of  the  agents  in  the  market  process  —  a  prodi- 
gality of  knowledge  rivaling  the  inside  information  of  the 
novelist  and  almost  matching  his  omniscience.  We  have  to 
adopt  the  point  of  view  of  each  of  the  different  agents  in  the 
process  rather  than  that  of  the  mere  observer.  Nor  is  this 
change  in  point  of  view  to  be  avoided ;  for  the  facts  which 
are  not  seen  are  alone  adequate  to  explain  the  facts  which 
are  seen,  the  process  as  it  takes  place.  And  later  still,  as 
the  final  step  in  the  problem,  we  shall  meet  the  necessity 
of  examining  the  process  by  which  these  maximum  demand 
prices  and  these  minimum  supply  prices  are  arrived  at. 
For  the  present,  however,  we  are  fortunate  in  having  merely 
to  assume  them.  But  note  again  that  we  assume  nothing 
that  is  unreal  or  gratuitous,  but  only  a  specific  situation,  in 
order  to  arrive  at  a  definite  analysis.  As  economists  we 
assume  only  the  very  facts  that  the  traders  are  doing  their 
best  to  guess  at  —  a  range  of  actual  conditions,  which,  as 
actual,  the  traders  are  conjecturing  as  best  they  can. 

Price  adjustment  at  its  simplest :  Unreserved  supply.  — 
Market  price  presents  itself  as  merely  the  equilibrium  point 
between  the  money  demand  for  a  given  article  and  the  market 
supply  of  that  article.  We  shall,  therefore,  best  approach 
this  problem  of  market  price  upon  the  assumption,  first,  of 
a  given  demand  and  of  a  given  supply,  without  inquiring 
why  or  whence  is  the  demand,  or  what  forces  have  deter- 
mined the  supply. 

Suppose,  then,  that  A  is  the  possessor  of  a  hat  which  he 
will  sell  for  what  he  can  get,  and  that  X  has  $5  which  he  is 
willing  to  pay  for  the  hat  rather  than  go  without  it.  Evi- 
dently the  price  may  be  $5  or  it  may  be  anything  less.  The 
precise  terms  of  the  actual  trade  will  be  determined  solely 
by  the  skill  and  guile  of  the  traders.  Whatever  A  gets  is 
so  much  for  him  of  sheer  gain ;  and  whatever  less  than  $5 
X  pays  is,  in  a  sense,  so  much  gain  for  him. 


46  THE  ECONOMICS  OF  ENTERPRISE 

But  now  if,  tog(>tlier  with  X  with  his  maximum  paying 
disposition  of  $5,  there  be  Y  with  a  maximum  bid  of  $4,  the 
lower  level  at  which  the  price  can  go  is  fixed  at  $4  —  at  some- 
thing, indeed,  a  little  more  than  M,  since  only  by  so  paying 
can  X  be  certain  oi  getting  tlu^  hat  as  against  Y.  The  seller 
A,  taking  only  that  which  iho  bidding  is  sure  to  give  him  if 
he  allows  the  bidding  to  work  itself  out  to  the  utmost  —  is 
safe  to  get  as  much  as  $4.  But  between  this  point  and  the 
maximum  possible  price  there  is  still  room  for  the  contest 
of  bargaining  to  fix  the  price ;  $4.01  or  $4.99  may  equally 
well  be  the  point  of  adjustment  —  anything  more  than  $4 
and  not  exceeding  $5. 

Suppose  now  that  four  hats  identical  in  quality  are  offered 
for  sale  at  whatever  they  will  bring  and  that  the  maximum 
demand  prices  are  $5,  $4,  $3,  $2,  $1 ;  the  competition  among 
those  buyers  fixes  the  price  at  from  $2  as  the  maximum  to 
anything  more  than  $1.  When  the  bidding  passes  beyond 
$1,  one  buyer  drops  out  —  evidently  because,  if  he  must  pay 
more  than  $1  for  a  hat,  he  would  rather  make  some  other 
use  of  his  money.  Since  there  are  only  four  hats  for  sale, 
the  price  must  be  high  enough  to  exclude  one  of  the  five 
bidders  —  must  be  above  $1  —  and  yet  low  enough  to  find 
buyers  for  the  whole  supply  —  must  not  be  above  $2.  Within 
these  limits,  the  contest  of  bargaining,  the  higgling  process 
between  buyers  and  sellers,  fixes  the  actual  market  price. 

And  note  now  that  it  would  not  at  all  affect  the  result  if  these 
different  demands,  instead  of  attaching  to  different  men,  repre- 
sented the  falling  disposition  of  one  man  to  invest  in  hats.  The 
first  hat  he  wants  at  not  over  $5.  If  you  are  going  to  sell  him  a 
second,  the  price  low  enough  for  this  will  have  to  be  not  more  than 
$4.  True,  you  might  have  made  him  believe  you  had  only  one 
hat  and  have  sold  this  at  |5,  and  later  have  sold  him  a  second  at 
$4  or  at  SS"*"  —  just  as  at  an  auction,  when  each  sale  is  a  separate 
sale,  one  man  may  buy  several  items  of  the  same  thing  at  several 
different  prices.  So  again,  if  there  were  different  bidders,  separate 
trades  and  prices  might  conceivably  be  made  with  each  separate 
man.  But,  if  it  be  assumed  that  there  is  to  result  a  one-price  market, 
the  price  on  all  the  supply  must  be  low  enough  to  market  all  of  it, 
and  all  items  will,  by  assumption,  sell  at  the  same  price.    So  it  is  not 


THE  ADJUSTMENT  OF  PRICE 


47 


true  that  two  hats  coukl  be  sold  at  a  price  of  $4.50  each, 


5  +  4 


Even  with  a  single  bidder  this  could  not  be  the  case,  were  it  true 
that  he  had  the  choice  to  stop  with  only  one  item  purchased — if,  that 
is  to  say,  the  sale  is  per  hat  rather  than  per  pair  of  hats.  This 
second  hat  he  wants  only  to  the  extent  of  being  willing  to  pay  $4 
for  it.  At  the  price  of  $4.50  he  will  prefer  to  buy  only  one ;  or, 
if  to  get  one,  he  were  compelled  to  buy  two  at  $4.50,  he  would 
rather  resell  one  than  retain  it  at  this  price  :  he  would  even  accept  a 
price  as  low  as  $4"*". 

Supply  with  reservation  prices.  —  But  now  we  introduce 
a  modification  affecting  the  supply  side  of  the  situation.  So 
far  the  hats  have  been  for  sale  at  whatever  they  will  bring. 
But  suppose  now  that  each  owner  has  his  minimum  selling 
price.  Formerly  there  were  prices  at  which  the  buyers 
would  rather  keep  their  money  than  to  buy  hats ;  now  the 
sellers  also  have  prices  at  which  they  would  rather  keep  the 
hats  than  to  have  the  money.  Each  owner  of  a  hat  has  a  con- 
dition attached  to  his  offer  of  sale  —  a  proviso  as  to  the  least 
that  he  will  take.  One  owner  will  not  sell  unless  he  can  get 
$1 ;  another  unless  he  can  get  $2 ;  another  unless  he  can  get 
$3 ;  and  the  fourth  unless  he  can  get  S4. 

It  is  evident,  then,  that  while  the  buyers  have  the  same 
bidding  prices  as  before,  these  bidders  face  entirely  changed 
conditions  of  supply.  As  the  buyers  still  have  limits  to 
their  bids  of  money  for  hats,  so  now  the  sellers  have  limits 
to  their  bids  of  hats  for  money.  The  buyers,  each  of  whom 
will  keep  his  money  unless  he  can  buy  at  a  certain  price, 
now  meet  sellers  each  of  whom  will  refuse  to  trade  unless 
he  can  get  a  certain  price.  Summarized,  the  situation  is  as 
follows : 


Bi's  limit  of  dollars  for  one  hat  is  5 
62*3  limit  of  dollars  for  one  hat  is  4 
Bs's  limit  of  dollars  for  one  hat  is  3 
Bi's  limit  of  dollars  for  one  hat  is  2 
Bs's  limit  of  dollars  for  one  hat  is  1 


Si's  limit  for  hats  is  one  hat  for  $4 
S2's  limit  for  hats  is  one  hat  for  $3 
Ss's  limit  for  hats  is  one  hat  for  $2 
Si's  limit  for  hats  is  one  hat  for  $1 


Under  these  conditions  what  will  the  price  be  ? 
At  a  price  of  $1,  only  one  item  of  supply  will  be  for  sale ;  while  all 
the  bidders  will  be  disposed  to  buy.    The  price  will,  therefore,  have 


48 


THE  ECONOMICS  OF  ENTERPRISE 


to  be  his/her.  At  SI  tlierc  will  be  four  sellers  and  onl}-  two  buyers. 
But  lit  $3  there  will  be  three  sellers  and  three  buyers.  The  price 
will,  therefore,  be  $3,  since  no  one  willins;  to  sell  at  this  price  fails 
of  selling,  and  no  one  willing  to  pay  this  price  fails  of  buying.  It  is  a 
stable  equiUbriuni.i 

Another  view  of  reservation  prices.  —  The  foregoing  is  the  usual 
method  of  ex])re.ssiiig  and  of  scihing  i)robleuis  of  this  sort  —  a 
method  of  cut  and  trj'  in  the  local  if)n  of  the  equilibrium  point.  A 
better  method,  however,  is  disclosed  through  a  further  analysis: 

In  anj'  market  where  owners  of  goods  will  s(>ll  only  if  they  can 
"  get  their  price,"  and  owners  of  money  buy  only  if  they  can  "  get 
their  money's  w^orth,"  it  is  evident  that  the  men  on  both  sides  of 


'  Note  on  Graphs.  —  Represented  graphically,  the  price  is  the  point 
of  intersection  of  the  demand  with  the  supply  curve,  the  demand 

curve  being  plotted  as  falhng 
from  the  left  of  the  page  to  the 
right  and  the  supply  curve  as 
rising  from  the  left  to  the  right. 
Rising  prices  are  indicated  on 
the  vertical  line  upward,  in- 
creasing quantities  on  the 
horizontal  line  to  the  right. 
The  foregoing  problem  would  be 
represented  graphically  as  in 
figure  (1)  opposite. 

The  demand  curve  may  also 
be  interpreted  to  report  the 
volume  of  supply  marketable 
at  different  prices,  e.g.,  one 
article  at  5,  2  at  4,  4  at  2.  So 
the  supply  curve  may  report 
the  volume  of  goods  obtainable 


4 i 

3 

o 

I. 

0-2  ■ ^ 


Quoin+i+y 
Fig.  1. 


at  different  prices,  e.g.,  one  at  1,  2  at  2,  4  at  4. 

Thus  the  statement  that  the  demand  for  a  good  has  increased  may 
rightly  report  (a)  that  there  are  the  same  number  of  bidders  as 
formerly,  but  each  with  a  higher  price  bid  ;  (b)  that  there  are  more 
bidders  than  formerly  at  the  different  prices.  But  the  statement 
cannot  rightly  mean  either  (a)  that  because  of  lower  prices  more 
goods  may  be  sold,  or  (6)  that  the  mere  needs  or  desires  for  goods 
are  now  greater. 

Likewise  the  supply  curve  may  change  to  mean  (a)  that  the 
same  number  of  goods  are  offered  at  different  reservation  prices,  or 
(6)  that  changed  numbers  of  goods  are  offered  at  the  different  price 


THE  ADJUSTMENT  OF  PRICE 


49 


the  market  must  have  made  an  appraisal  of  the  thing  owned 
relatively  to  the  thing  offered.     This  fact  points  to  the  similarity 

levels.  Thus  the  different  demand  curves  in  figure  (2)  express 
differences  of  paying  dispositions  with  the  same  number  of  bids. 
With    the  higher  bids,   the  curve  moves  upward.     Likewise    the 


Fig.  2. 


Fig.  3. 


different  supply  curves  in  figure  (3)  indicate  the  different  reservation 
prices  attaching  to  the  same  number  of  items  of  supply.     With 
higher      reservation 
prices  the  curve 
moves  upward. 

But  changes  in  the 
number  of  demands 
at  the  respective 
levels  of  price  are  in- 
dicated by  the  move- 
ment of  the  demand 
curve  to  the  right 
or  the  left.  Like- 
wise changes  in  the 
number  of  goods  for 
sale  at  the  respective 
levels  of  price  are  in- 
dicated by  the  move- 
ment of  the  supply 
curve  to  the  right  or 
left ;  see  figures  (4) 
and  (5). 


Fig.  4. 


It  is  worth  noting  also  that  combining  the  demand  schedules  of 
several  different  men  may  not  merely  move  the  demand  curve  to 


50 


THE  ECONOMICS  OF  ENTERPRISE 


botwpen  the  demaiul  and  the  supply  side  of  any  particular 
oxrhauRc  ;  tlio  owium's  of  hats  may  bo  thought  of  as  having  either  a 
sui)i)ly  of  hats  or  a  deniaiul  for  money,  —  tlic  owners  of  money 
as  having  either  a  demand  for  hats  or  a  supply  of  money.  Each 
side  has  things  for  exchange,  wit  li  limits  on  exchange  expressed  in 
the  other  thing. 

Because  of  this  similarity  it  is  possible  to  combine  the  buyers  and 

the  ripfht,  but  must  greatly  change  its  inclination.  For  example : 
the  bidding  disposition  of  one  individual  of  say  5,  4,  3,  2,  will  be  ex- 
pressed in  a  curve  falling 
at  an  inclination  of  45 
degrees.  Combining 
four  schedules  of  the 
same  inclination  gives 
an  aggregate  demand  of 
5,  5,  5,  5,  4,  4,  4,  4, 
3,  3,  3,  3,  2,  2,  2,  2 ;  the 
four  curves  unite  into  a 
wholly  different  curve. 
See  figure  (6).  This 
combined  curve  reports 
a  high  degree  of  elas- 
ticity in  pm-ehases.  The 
more  different  purchases 
of  a  given  paying  dis- 
position the  more  de- 
mands will  be  uncovered 
by  a  given  fall  in  price, 
and  the  less  rapidly  the 
price  will  suffer  with  expanding  supplies  of  goods.  (Parallel 
reasonings  apply  to  the  supply  side  of  the  price  equation.) 

Generahzing,  then,  the  language  of  plotting :  With  stationary 
supply,  the  demand  curve  moving  up  or  to  the  right  must 
mean   higher  prices ;    moving  to  the  left  or  down,   lower  prices. 

With  stationary  de- 
mand, the  supply  curve 
moving  up  or  to  the  left 
means  higher  prices; 
moving  to  the  right  or 
down,  lower  prices. 

With  both  curves 
moving,  the  possible  com- 
binations and  the  differ- 
ent price  adjustments  are 
indefinitely  numerous. 


Fig.  5. 


Fig.  6. 


THE  ADJUSTMENT  OF  PRICE 


51 


sellers'  money  estimates  of  hats  into  one  schedule  which  will  ex- 
press for  each  man  the  relation  for  him  between  money  and  hats. 
That  is : 


Those  who 

Those  who 

HAVE  Hats 

HAVE  Money 

B, 

estimates  6  of  money  as  equal  to  1  hat 

B2 

estimates  4  of  money  as  equal  to  1  hat 

s, 

estimates  4  of  money  as  equal  to  1  hat 

B, 

estimates  3  of  money  as  equal  to  1  hat 

S2 

estimates  3  of  money  as  equal  to  1  hat 

B4 

estimates  2  of  money  as  equal  to  1  hat 

s, 

estimates  2  of  money  as  equal  to  1  hat 

Be 

estimates  1  of  money  as  equal  to  1  hat 

Si 

estimates  1  of  money  as  equal  to  1  hat 

Those  who  esteem  hats  the  most  highly,  and  have  purchasing  power 
either  in  the  form  of  money  or  of  hats,  will  be  the  owners  of  the  hats 
after  the  exchange.  And  since  there  are  four  hats  in  the  market, 
the  price  must  be  high  enough  to  exclude  all  but  four  of  the  men. 
Counting  down  the  schedule  discloses'  the  price  to  be  three.  Bi  and 
B2  and  B3  each  give  $3  for  a  hat,  and  S2  and  S3  and  S4  each  sell  a 
hat  for  $3.  Si  may  be  said  to  have  thought  too  much  of  hats  or  too 
little  of  dollars  to  make  the  exchange,  and  B4  and  Bs  may  be  said  to 
have  thought  too  little  of  hats  or  too  much  of  dollars  to  make  the 
exchange.  It  is  also  evident  that  Bi  and  B2  bought  for  less  money 
than  they  were  willing  to  pay,  and  that  S3  and  S4  sold  for  more 
money  than  the  least  that  they  would  accept.  These  differentials 
between  what  one  would  sell  for  or  buy  for  if  he  had  to,  and  what 
he  actually  has  to  buy  for  or  sell  for,  are  called  respectively  buyers' 
and  sellers'  surpluses. 

It  is  thus  evident  that  if  we  decide  to  regard  the  money  side  of  the 
situation  as  demand  for  hats,  and  the  hat  side  of  the  situation,  not 
as  demand  for  money,  but  only  as  supply  of  hats,  we  must  recognize 
the  holders  of  hats  as  themselves  having  demands  for  hats. 
Each  seller  plaj^s  in  fact  two  roles.  If  he  had  not  a  hat,  he  would  be 
ready  to  buy  one  at  anything  below  his  reservation  limit.  Or 
selling  at  above  his  limit  he  should  logically  buy  again  if  the  price 
falls  as  low  as  his  limit.  The  case  is,  then,  not  one  of  willingness  to 
sell  at  any  price,  but  is  rather  like  that  of  an  auction  where  goods 
purport  to  be  sold  without  reservation,  but  where,  in  fact,  the  seller's 


52  THE  ECONOMICS  OF  ENTERPRISE 

own  tlcmauds  arc  represented  by  an  auUiorizeil  bidder-in  who  stands 
out  in  the  crowd.  These  reservation  prices  ought  then  to  rank  as 
within  the  demand  cohnnn.  Transferring  these  reservation  prices 
so  as  to  api)ear  as  demands,  our  jirobleni  reduces  itself  to  the  simple 
type  of  4  items  of  goods  offennl  for  sale  at  whatever  thej^  ma.y  bring 
as  over  against  the  original  demand  of  5,  4,  3,  2,  1  of  buyers'  maxima 
l)lus  the  1,  2,  3,  and  4  of  sellers'  minima  —  a  total  demand  of  5,  4  4, 
3  3,  2  2, 1  1.  Ov(>r  against  this  arc  the  four  items  of  goods  for  sale 
witliout  limitation  of  any  sort.  The  price  is,  of  course,  as 
before,  3. 

Utility  in  relation  to  money  demand.  —  The  relation  between  the 
utility  of  any  good  and  the  disposition  to  offer  a  price  for  it  will  be 
fully  considered  in  a  later  chapter  (VII).  At  present,  it  suffices  to 
note  that,  when  anything  is  high  in  price,  relatively  little  of  it  can 
be  sold.  It  does  not  follow,  however,  that  with  increasing  plenty 
the  consum])tion  of  any  particular  good  can  be  enlarged  without 
limit.  Apples  sometimes  rot  upon  the  ground  or  in  the  cellar  be- 
cause we  have  more  than  we  want ;  that  is  to  say,  useful  things 
may  exist  in  such  abundance  as  to  have  no  value ;  you  cannot  sell 
them  or  even  give  them  awa}'.  Water,  for  example,  may  be  worth 
nothing  —  not  that  any  particular  amount  of  water  has  become  less 
capable  of  satisfjdng  a  human  need,  but  because  the  supply  of  water 
outruns  the  total  need.  Some  part  of  the  total  stock  is  thus  ab- 
solutely without  utility.  This  is  simply  another  manner  of  saying 
that  human  desires  and  needs  are  not  infinite  in  any  particular 
direction ;  and  this  again  means  simply  that  needs  and  desires  be- 
come less  intense  with  partial  satisfaction.  One  does  not  ordinarily 
care  as  much  for  a  second  glass  of  water  as  for  the  first.  Were  this 
not  true,  our  work  could  bring  us  no  great  good,  eating  would  leave 
us  always  hungrj^,  and  our  wealth  afford  us  little  comfort  or  content. 
The  same  principle  is  illustrated  in  our  daily  expenditures,  and  ex- 
plains how  we  come  to  make  them  as  we  do.  No  one  applies  his 
entire  income  to  the  purchase  of  food  or  shelter.  Food  is  the 
primary  necessity,  but  clothing  is  more  acutely  required  than  is  a 
second  dinner.  We  supply  our  wants  in  the  order  of  their  intensities. 
When  you  have  purchased  yourseff  a  reasonably  large  wardrobe,  the 
fact  that  you  make  no  further  purchases  of  this  sort  does  not  indicate 
that  you  have  no  further  desire  for  clothing,  but  only  that  you  have 
a  stronger  desire  for  something  else.  It  is  a  peculiar  and  exasper- 
ating fact  about  a  dollar  that  you  can  spend  it  only  once.  To  buy 
one  thing  is  to  go  without  some  other,  to  sacrifice  an  alternative  pur- 
chase.    You  must  choose.     Choosing,  you  follow  the  line  of  the 


THE  ADJUSTMENT  OF  PRICE  53 

smaller  sacrifice.  So  the  purchase  of  apples  at  ten  cents  each 
would  mean  to  you  and  to  me  the  lack  of  other  things  that  we  desire 
more  intensely  than  apples. 

Margins  and  marginality.  —  Margins  of  one  sort  or  another  are 
present  in  almost  all  sorts  of  economic  relations.  Where  the  items 
of  supply  and  of  demand  are  many  there  is  a  marginal  buyer  — 
the  man  who  is  upon  the  point  of  refusing  to  buy  if  the  price  shall 
rise  —  the  man  whose  demand  was  barely  uncovered  by  the  last 
fall  in  price ;  and  there  is  always  a  marginal  excluded  buyer  —  the 
man  who  does  not  buy,  but  will  buy  if  the  price  goes  one  jot  lower. 
Similarly,  there  is  the  marginal  seller,  whose  reservation  price  is 
barely  covered  by  the  market  price ;  and  the  excluded  marginal 
seller,  who  nibbles  at  the  price  bait,  but  will  not  take  it  until  some- 
thing better  is  offered  —  that  man  nearest  to  seUing,  who  yet  does 
not  sell. 

So,  again,  we  speak  of  the  marginal  item  of  goods  offered  or  sold, 
or  of  the  marginal  item  of  goods  bought,  meaning  commonly  the 
item  sold  by  the  marginal  seller  or  bought  by  the  marginal  buyer. 
In  the  illustrative  problem  given  on  page  47,  with  the  market  price 
settling  at  3,  there  was  a  marginal  buyer  at  3,  a  marginal  seller  at 
3,  and  a  marginal  item  sold  at  3,  or  bought  at  3.  So,  again,  at  any 
given  price  for  any  given  product,  there  are  lands  barely  worth  cul- 
tivating for  that  product ;  these  are  the  marginal  lands  in  that  use. 
And  similarly  there  are  marginal  tools  and  machines.  So,  at  any 
given  price  for  products,  there  are  marginal  employers  and  mar- 
ginal businesses  —  cases  where  any  fall  in  price  or  any  rise  in  the 
cost  of  production  will  diminish  or  suspend  the  contribution  of 
product.  And  there  are  marginal  laborers  —  meaning  sometimes 
the  man  just  on  the  point  of  aljandoning  an  employment  if  the  wages 
fall,  or,  again,  meaning  the  laborers  of  any  grade  employed  by  a 
marginal  employer. 

And  there  are  likewise  the  marginal  items  of  land  or  of  borrowed 
capital  funds,  as  there  are  marginal  borrowers  and  lenders  of  each. 

Note  on  the  marginal  analysis.  —  This  manner  of  market  analy- 
sis especially  characteristic  of  the  Austrian  school  of  economic 
doctrine  has,  under  the  name  of  the  marginal  method,  now  estab- 
lished itself  among  practically  all  economists,  —  although  there 
remain  different  views  enough  of  the  possible  purposes  which  this 
analysis  may  serve.  It  is  not,  however,  quite  true  to  the  spirit  of 
the  analj^sis  to  say  that  it  leaves  no  room  for  the  process  of  market 
higgling.     The  doctrine  at  its  logical  extreme  assumes  that,  as  the 


M  THE  ECONOMICS  OF  ENTERPRISE 

items  of  demand  become  more  numerous,  the  margin  interval  within 
which  the  higgling  process  may  be  operative  is  constantly  reduced. 
A  sufficiently  minute  gradation  of  both  offer  and  demand  is  as- 
sumed —  so  near  an  approach  to  infinitesimals  —  as  to  justify  the 
treatment  of  the  seUing  price  as  accurately  a  marginal  price  for 
both  demand  and  supply.  Admitting  all  the  necessary  attendant 
conditions,  namely,  that  all  the  commodities  are  of  equal  desirabiUty, 
all  the  competitors  in  the  market  simultaneously,  and  "  that  the 
buyers  and  sellers  make  no  mistakes  about  the  actual  state  of  the 
market  such  as  would  prevent  them  from  really  pursuing  their 
egoistic  interest  "  *  —  assuming,  in  short,  a  perfectly  frictionless 
market  —  this  may  be  admitted  as  an  accurate  account,  descriptively, 
of  the  market  process.  But  it  is  another  matter  to  assert  that  the 
point  of  adjustment  expresses  marginal  utiUties,  or  measures 
them,  or  is  measured  by  them.  It  is  still  another  matter  to  assert 
that  these  marginal  traders  are,  as  against  the  opposing  in-pressing 
volumes  of  commodity  and  of  purchasing  power,  the  causal  facts 
determining  the  ultimate  price  adjustment.  It  is  yet  even  more 
questionable  to  assert  that,  while  the  market  price  coincides  with  the 
price  limits  of  both  marginal  traders,  the  price  is  invariably  deter- 
mined by  the  price  limit  of  only  one  —  the  buyer.  All  these  ques- 
tions really  resolve  themselves  into  the  one  great  question  —  What 
are  the  causal  forces  in  the  market  adjustment? 

But,  at  any  rate,  it  should  now  be  clear  that  the  ultimate 
forces  in  any  problem  of  price  present  themselves  in  the  form 
of  a  supply  of  goods  which  are  to  be  equated  against  a  volume 
of  money  demand,  and  that  the  price  is  the  point  of  adjust- 
ment between  these  two  opposing  volumes  —  the  point  at 
which  the  two  sides  of  the  market  equation  are  brought  to 
an  equilibrium.  It  follows  that  the  market  price  is  not  an 
average  of  aU  the  demand  prices,  or  of  all  the  supply  prices, 
or  of  all  the  demand  and  the  supply  prices  together ;  the  ad- 
justment is  really  at  the  marginal,  rather  than  at  the  average, 
point.  Averages  have,  indeed,  nothing  to  do  with  the  case. 
The  margins,  however,  are  the  points  at  w^hich,  and  not  by 
which,  the  price  is  fixed ;  all  items  of  supply  and  all  items  of 
demand  are,  actually  or  potentially,  equally  causes  in  the 
adjustment. 

It  has  also  been  showm  that  the  determination  of  price  is 
to  be  traced  not  more  to  supply  than  to  demand  or  to  demand 

1  Bohm-Bawerk,  Positive  Theory  of  Capital,  p.  204. 


THE  ADJUSTMENT  OF  PRICE  65 

than  to  supply;  that  with  the  demand  taken  as  fixed,  price 
changes  with  every  change  in  the  supply,  and  that  with  the 
supply  taken  as  fixed,  price  changes  A\dth  every  change  in  the 
demand ;  that  supply  means  all  of  the  goods  there  are  for 
sale  at  any  price,  demand,  all  of  the  price-paying  dispositions 
directed  toward  the  supply ;  and  that  the  reservation  prices 
of  the  sellers  are,  in  ultimate  analysis,  demands,  and  are  as 
important  to  the  fixation  of  price,  and  important  in  precisely 
the  same  way,  as  are  the  price-paying  dispositions  of  the 
seekers  for  goods. 

But  the  present  chapter  has  taken  for  granted  an  existing 
volume  of  demand  —  inclusive  of  the  demands  of  both  buyers 
and  sellers  —  and  an  existing  volume  of  goods  as  supply, 
making  scant  attempt  to  explain  the  demands  and  making 
no  attempt  to  explain  the  supply.  Logically,  therefore,  these 
two  tasks  await  us  —  an  examination  of  the  relation  of  needs 
and  desires  to  demand,  and  of  cost  of  production  to  supply. 
We  shall  begin  with  cost  of  production  and  supply. 

The  next  chapter  ^^^ll,  then,  show  that  cost  of  production 
bears  on  market  price  through  affecting  supply,  and  in  no 
other  way ;  that  with  goods  susceptible  of  changes  in  supply, 
cost  of  production  is  the  key  to  these  changes,  and  that  only 
as  the  explanation  of  supply,  and  in  the  sense  adapted  to  serve 
as  such  explanation,  does  cost  of  production  concern  the  econ- 
omist ;  that  therefore  it  is  cost  in  the  competitive  sense  solely 
and  in  price  terms  only  that  can  signify  in  the  analj'sis  of  the 
price  problem  —  cost  to  the  hiring  entrepreneur  and  not  to 
the  employed  laborer  —  cost  in  the  sense  of  expenditure  and 
fhiancial  sacrifice  rather  than  of  pain  or  discomfort  or  wear  of 
life ;  that,  as  the  limit  on  supply,  and  as  compensated  in  the 
forthcoming  of  product  saleable  at  a  price,  cost  of  produc- 
tion must  include  and  express,  in  terms  of  a  price  total,  all 
that  the  entrepreneur  computes  as  impediment  or  resistance 
in  his  process  of  production  ;  that  the  cost  computation  must 
stand  as  a  purely  personal  and  individual  computation; 
that,  as  the  cost  computation  is  the  computation  of  an  en- 
trepreneur, it  must  express  and  report  his  methods,  processes, 
and  decisions  —  must  declare  the  indemnity  or  compensa- 
tion necessary  to  obtain  from  him  his  product  —  and  must 
therefore,  include,  as  resistances  to  be  overcome  by  the  price 
of  the  product,  (1)  all  exj^ected  pains,  disagreeablenesses,  and 
dangers  in  the  process,  at  those  prices  at  which,  as  resistances, 


50  THE  ECONOMICS  OF  ENTERPRISE 

thry  fuiu'tion;  (2)  all  prospoctivo  expoiulitures ;  (3)  such 
clisi)lacod  alternative  gains  as  actually  bear  u])on  the  case; 
(4)  the  entrejireneur's  opposing  (lis])osition  to  consume  his 
resources  rather  than  to  invest  them  in  the  Une  of  production 
under  examination ;  (5)  all  hazards  or  risks  as  he  actually 
estimates  them,  or  has  to  pay  to  be  protected  from  them; 
and  ((5)  all  taxes  or  other  regular  or  casual  burdens  imposed 
uiion  him  by  the  untlertaking. 

It  will  thus  appear  that  altt^'native  ]^rofits  are  costs  in  any 
given  untlertaking  —  are  necessary  profits  if  the  undertaking 
is  to  continue ;  that  costs  are  mostly  due  to  the  resisting  ap- 
peal of  the  demands  for  other  things  ;  that  costs  are  the  pre- 
cise analogue,  in  the  production  of  goods,  to  the  seller's 
refusal  prices  in  the  marketing  of  goods ;  that  ordinarily 
these  costs  explain  these  refusal  prices ;  and  that  therefore 
it  is  a  purely  fictitious  issue  to  argue  which  is  the  more  im- 
portant — •  demand  or  supply  —  in  the  fixation  of  price. 

And  finally  it  will  be  showm  that,  in  last  analysis,  all  cases 
of  marginality  in  production  are  personal  margins  and  not 
margins  of  agents  or  instruments  ;  that  there  are  an  indefhiite 
number  of  all  three  sorts ;  but  that  instruments  and  agents 
are  marginal  only  relatively  to  the  entrepreneur  who  em- 
ploys them ;  and  that  no  margin  of  any  sort  is  relevant  to 
the  determination  of  market  price  excepting  as  bearing  in 
some  way  upon  the  limitation  of  the  supply. 


CHAPTER  VI 

SUPPLY    DETERMINED    BY    COST    OF    PRODUCTION 

How  price  affects  purchases.  —  It  is  a  commonplace  fact 
that  if  you  are  going  to  sell  things  at  a  very  high  price  you 
will  not  sell  many  of  them.  When  bananas  are  ten  cents 
each,  most  people  purchase  in  limited  quantities.  If  I  am 
exceedingly  hungry  for  bananas,  I  may  buy  one  at  this 
price.  If  the  supply  increases  and  the  price  falls,  my  desires 
express  themselves  in  larger  purchases.  While  neither 
my  need  nor  my  price-paying  disposition  has  expanded,  new 
conditions  have  arisen  in  which  banana  appetites  of  lower 
intensity  come  into  play,  much  as  one  may  imagine  to  him- 
self the  gradual  subsidence  of  a  lake  or  sea,  and  the  appear- 
ance, one  after  another,  of  reefs  and  bars  and  islands. 

Price  with  fixed  supply :  Cost  and  supply.  —  It  is  not 
always,  however,  the  case  that  the  supply  of  products  is  a 
changeable  supply.  It  occasionally  happens  that  the  volume 
of  goods  of  a  particular  kind  is  entirely  fixed  and  definite. 
There  are  some  things,  that  is  to  say,  the  supply  of  which  is 
beyond  the  possibility  of  enlargement  —  like  18th  century 
furniture,  the  old  masters,  grandfathers'  clocks,  and  the 
like.  And  some  other  things  there  are,  the  supply  of  which 
changes,  but  not  in  response  to  human  decision  or  effort,  — 
meteorological  stones,  for  example.  The  first  step  in  the 
analysis  of  market  price  assumes,  therefore,  a  fixed  supply. 
But  cases  of  this  sort  are  not  common,  and  present  little 
difficulty  in  analysis,  and  have  already  received  sufficient 
attention.  Monopolistic  limitations  of  supply  are  also 
readily  disposed  of  from  the  point  of  view  of  theory.  It 
suffices  at  present  to  grasp  the  truth  of  Senior's  statement : 
"  Any  other  cause  limiting  supply  is  just  as  efficient  a  cause 
of  value  in  an  article  as  the  necessity  of  labor  in  its  produc- 

57 


58  THE  ECONOMICS  OF  ENTERPRISE 

tion.  And,  in  fact,  if  all  the  commodities  used  by  man  were 
supplied  by  nature  without  any  interference  whatever  of 
human  labor,  but  were  supplied  in  precisely  the  same  amounts 
that  th(\v  now  are,  there  is  no  reason  to  sui)pose  either  that 
they  would  cease  to  be  valuable  or  would  exchange  at  any 
other  than  the  present  proportions."  ^  Cost^of  ^proiimition, 
that  is  to  say,  bears  upon  market  price  and  fixes  market 
price  in  the  sense  solely,  and  in  the  degree,  that  it  serves 
to\determine  or  motlify  the  supply/side  of  the  value  equation. 
Supply  affects  price.  Cost  of  production  limits  supply. 
Our  problem,  then,  is  to  analyze  the  nature  of  cost  of  pro- 
duction and  to  show  the  manner  of  its  bearing  on  supply. 

Specialization  and  Cost :  The  fundamental  principle.  — 
We  have  already  noted  that  in  our  actual  pecuniary  form  of 
society  division  of  labor  is  possible  only  on  terms  of  the 
possible  exchange  of  products.  But  how  does  this  division 
of  labor  establish  itself?  On  what  basis  does  each  man 
select  for  himself  a  particular  line  of  production?  And 
how  far  does  he  carry  production  in  this  line?  And  why 
does  he  stop?  Viewed  in  the  large,  cost  of  production  is 
one  aspect  of  the  general  division  of  labor  —  the  doing  of 
one  thing  on  terms  of  foregoing  the  doing  of  another. 

In  human  affairs  as  in  the  inanimate  world,  it  may  be 
said  that  force  always  follows  the  line  of  least  resistance. 
Water  seeking  an  outlet  breaks  through  the  weakest  point 
in  the  barrier.  The  chain  gives  way  at  its  weakest  link. 
When  two  opposing  forces  meet,  the  weaker  is  overbalanced. 
The  line  of  least  resistance  includes  also  the  line  of  the 
strongest  pull.  The  stronger  attraction  prevails.  So  men, 
in  choosing  between  different  pains  or  discomforts,  refuse 
the  greater,  submitting  to  the  less;  in  choosing  between 
different  attractions,  they  select  the  greater,  following 
always  the  line  of  least  motive  resistance.  That  is  to  say, 
the  line  of  human  action  is  the  line  of  least  sacrifice.  Accu- 
rately speaking,  one  cannot  act  contrary  to  his  choice.  Men 
always  do  the  thing  which  they  prefer.  If  the  thing  done 
were  not  the  preferred  thing,  another  thing  would  be  done. 

1  Senior,  Political  Economy,  6th  edition,  London,  p.  24. 


SUPPLY  AND   COST  59 

The  choice  may  be  between  several  evils ;  in  that  case  the 
choice  of  the  least  is  none  the  less  a  choice. 

Least  sacrifice.  —  We  are  in  substance  seeking  a  formula 
for  human  choices  in  the  field  of  production.  Here  choice 
follows  the  psychological  law  valid  for  all  human  activity : 
men  follow  the  line  of  least  sacrifice.  To  say  merely  that 
each  man  seeks  always  the  maximum  of  satisfaction  of  his 
wants  is  not  adequate  for  all  cases.  Men  commonly  dislike 
work ;  at  all  events  some  of  them  do ;  and  all  men  do  at  some 
nearer  or  more  distant  fatigue  limit.  How  set  off  the  utilities 
of  product  against  the  irksomeness  of  the  productive  process  ? 
And  what  shall  be  said  of  the  men  who  are  submitting  to  the 
pains  of  work  in  order  to  avoid  the  pains  of  unsatisfied  want  ? 
Only  where,  between  two  lines  of  agreeable  work,  one  chooses 
that  line  which  in  process  and  product  affords  the  larger 
satisfaction  of  wants  is  the  formula  of  the  maximizing  of 
pleasure  adequate.  But  the  formula  of  the  minimizing  of 
sacrifice  is  everywhere  sufficiently  inclusive.  For  the  man 
who  works  because  he  finds  work  pleasant,  it  would  be  a 
sacrifice  to  refrain  from  work ;  he  chooses  that  line  of  work 
which  he  prefers,  in  view  both  of  the  pleasures  of  the  activity 
and  of  the  accompanying  compensations  in  productiveness. 
He  ceases  to  work  at  the  point  where  continuance  would 
be  the  greater  sacrifice.  The  man  to  whom  all  effort  is 
irksome  chooses  that  line  of  activity  which,  in  view  both  of 
the  quality  of  the  work  and  of  its  compensation,  involves 
the  smallest  sacrifice.  For  him  who  prefers  idleness  to  activ- 
ity, activity  would  mean  the  larger  sacrifice. 

This  principle  of  the  minimizing  of  sacrifice  is,  then,  the 
generalization  for  which  we  are  seeking.  In  substance 
it  is  a  particular  application  of  a  law  general  in  the  physical 
and  in  the  moral  world.  Men  follow  their  choices.  But 
it  is  still  to  be  noted  that  choice  is  an  outcome  of  a  complex 
of  internal  and  external  factors.  The  man  is  himself  a  part 
of  the  problem.  There  are  outer  inducements,  temptations, 
penalties ;  there  are  inner  appetites,  antagonisms  of  con- 
science and  sympathy,  —  hopes,  loves,  hates,  and  fears,  — 
all  phases  of  moral,  mental,  and  physical  weakness  and 
strength.     Out  of  the  combination  of  these  complex  and 


00  THE  ECONOMICS   OF  ENTERPRISE 

var>iiig  factors  results  a  lino  of  new  direction  —  one  of  least 
resistance  when  all  the  varying  factors  are  allowed  for, 
humanly  sjieaking,  a  clioice. 

Pin-ely  as  economists  w(>  are  fortunately  free  from  the 
necessity  of  investigating  the  origin  of  choices  or  any  of  the 
psychological  difficulties  surrounding  the  question.  It  is 
sufficient  for  us  that  these  choices  take  place  as  human 
nature  presents  itself.  Men  follow  the  line  of  least  motive 
resistance. 

Cost  in  the  isolated  economy.  —  But  the  manner  by  which 
different  men  work  out  their  selection  of  different  specialized  lines 
of  gainful  acti\ntj%  and  the  computations  involved  in  this  process, 
may  well  be  different  in  differently  organized  societies. 

The  isolated  individual  economy  —  that  of  Crusoe,  for  example, 
an  economy  not  unlike  in  principle  that  of  a  socialistic  or  coUectivist 
society  —  furnishes  its  peculiar  problem  of  production  costs.  Crusoe 
could  not  rationally  produce  anything  unless  its  utility  overweighed, 
or  at  least  balanced,  both  the  discomfort  of  the  work  applied  and  the 
loss  of  such  utilities  of  recreation  as  the  situation  offered.  And, 
within  the  limits  of  this  first  principle,  no  product  could  be  ration- 
ally produced  the  production  of  which  involved  the  displacement  of 
a  more  desirable  product.  So  far  then  as  he  planned  his  work  ra- 
tionall}',  Crusoe  was  continually  turning  his  efforts  to  that  undone 
thing,  the  doing  of  wMch  had  come  to  be  of  leading  importance  — 
subject  all  the  while,  of  course,  to  the  condition  that  it  was  worth 
the  labor  penalties  involved.  At  a  certain  point  fishing  was  aban- 
doned for  game :  More  fish  were  refused  in  the  interests  of  more 
game.  The  game  cost  fish,  or  the  fish  cost  game ;  since  the  work 
which  would  produce  either  fish  or  game  was  apphed  to  game  and 
withdrawn  from  fish.  The  limit  upon  production,  the  cost  barrier, 
was  reached  at  the  first  one  of  two  margins,  —  the  margin  of  effort 
and  of  displaced  recreation,  or  the  margin  of  displaced  alternative 
product.    - 

These  displacements  of  possible  products,  these  foregoings 
of  alternative  openings,  these  sacrifices  of  some  second  thing 
in  the  process  of  getting  some  particular  thing,  are  perhaps 
best  indicated  under  the  term  opportunity  costs.  To  go  with- 
out fish  to  get  game  or  to  raise  wheat  upon  terms  of  foregoing 
the  raising  of  corn  may  be  taken  as  illustrative  of  one  of  the 
simplest  aspects  of  this  doctrine  of  opportunity  cost. 


SUPPLY  AND   COST  61 

What  resistances  cost  includes.  —  One  of  the  difficulties 
in  the  case  is,  however,  that  the  term  cost  is  not  quite  satis- 
factory for  all  aspects  of  the  doctrine : 

Suppose,  for  example,  that  a  child  has  been  given  both  a  pear  and  a 
peach ;  that  some  predatory  boy  tries  to  seize  them ;  and  that  the 
only  method  of  saving  either  is  to  drop  one,  say  the  pear,  in  the 
wayside  weeds,  and  to  run  for  shelter  with  the  peach  while  the  aggres- 
sor is  picking  up  the  pear :  What  has  the  peach  cost  ? 

True  the  peach  was  a  gift.  In  a  certain  sense,  therefore,  it  cost 
nothing.  Nevertheless  it  is  retained  only  on  terms  of  foregoing 
the  pear.  The  term  cost  seems  not  quite  satisfactorily  to  cover  the 
case.     Perhaps  displacement  or  foregoing  would  be  preferable. 

Or,  if  one  offers  you  your  choice  between  a  ride  and  an  evening  at 
the  theater,  it  is  awkward  to  say  that  the  acceptance  of  the  one  is  at 
the  cost  of  the  other.  Yet  the  resistance  to  the  taking  of  the  one  is 
the  letting  go  of  the  other.  As  in  the  preceding  case,  the  chosen 
thing  remains  a  gift.  The  term  cost  is  here  also  measurably  a 
misfit :  the  nature  of  the  resistance  is  better  indicated  by  some  term 
like  displacement  or  sacrifice  or  foregone  opportunity. 

Or,  if  with  a  dollar  which  you  have  earned  you  are  at  choice 
between  buying  a  book  or  a  pocket  knife,  and  finally  buy  the  book, 
the  resistance  overcome  is  best  expressed,  not  by  the  labor  devoted 
to  the  earning  of  the  dollar,  and  not  by  the  dollar  itself,  but  by  the 
alternative  application  of  the  dollar.  True  it  is,  in  one  sense,  that 
the  book  cost  a  dollar,  because  that  was  the  price  of  it ;  or  you  can 
reasonably  say  that  it  cost  you  a  day's  labor.  But  the  ultimate 
significance  of  the  labor  of  the  dollar  was  in  the  product  which  it 
could  be  made  to  achieve  for  you.  The  highest  cost  of  the  book,  the 
best  test  or  measure  of  its  worth  to  you,  was  in  the  significance  of  its 
strongest  competitor,  the  knife.  And  still,  in  this  case  as  in  the 
others,  some  term  like  displacement  or  foregone  opportunity  or 
sacrifice  appeals  as  the  more  appropriate  for  expressing  the  ultimate 
fact. 

Or,  if  one's  work  for  a  day  will  produce  for  him  one  bushel  of 
wheat  or  two  bushels  of  corn  —  these  being  the  productive  oppor- 
tunities at  the  top  of  the  list  —  and  wheat  is  chosen,  it  is  possible  to 
say  either  that  the  wheat  cost  a  day's  labor  or  that  it  cost  two  bushels 
of  corn.  But  inasmuch  as  the  choice  was  really  between  wheat  and 
corn,  rather  than  between  wheat  and  rest  or  between  wheat  and 
recreation,  the  corn  offers  the  leading  resistance  and  is,  therefore, 
the  cost,  in  the  sense  of  displaced  opportunity  or  foregone  fact  or 
sacrifice. 


02  THE  ECONOMICS  OF  ENTERPRISE 

Actually  the  notion  of  cost  of  jiroduction  as  employed  in 
economic  usage  is  made  to  do  duty  for  all  of  these  cases  as 
well  as  to  include  such  money  outlays,  or  expenditures,  as 
may  also  require  to  be  taken  into  account.  (\)st  of  pro- 
duction, that  is  to  say,  points  in  its  ultimate  significance  to 
the  thought  of  opposition,  conflict,  hindrance,  resistance. 

CoUectivist  cost  as  displaced  opportunity.  — ■  Parallel  to  the  Crusoe 
computation  of  cost  of  pri)ductiou  is  the  socialistic  or  collectivist  ^ 
coniputatiou.  An  ideal  atljustnient  of  collectivist  costs  would  pre- 
scribe, (1)  that  no  i)roduct  impose  sacrifices  in  the  l^urdcns  of  labor 
and  in  the  foregone  recreation,  overbalancing  the  advantages  to 
be  derived  from  the  product ;  (2)  that  no  product  displace  a  prod- 
uct more  desirable  than  itself.  The  cost  of  any  product  must 
be  found  in  whichever  of  these  two  lines  the  resistance  were 
the  greater. 

That  form  of  sacrifice  which  is  expressed  in  the  term  opportunity 
cost  is,  then,  an  aspect  of  cost  of  production  especially  important 
both  in  the  isolated  and  in  the  collectivist  economy.  And  the 
doctrine  extends  more  widely  than  merely  to  the  appUcations  of 
productive  labor.  It  applies  also  for  all  instruments  of  production. 
Shall,  for  example,  certain  lands  of  the  community  be  used  as 
orchard  lands?  What  then  is  the  cost  of  production  of  the  fruit 
obtained  from  them?  This  is  to  ask  what  are  the  counter-attrac- 
tions in  the  cmplojanent  of  the  land  —  what  does  the  having  of  the 
fruit  mean  in  terms  of  going  without  something  else.  The  land 
being  fertile  is  going  to  be  used  for  something.  The  problem  of 
choice  lies  in  the  decision  between  two  alternative  products  —  fruit 
versus  its  strongest  competitor.  The  cost  of  either  product  is, 
then,  the  displacement  of  the  other  —  a  problem  of  sacrifice,  a 
foregoing;  this  is  a  tj.'pical  case  of  opportunity  cost.  This  sort 
of  cost  of  production  is,  indeed,  the  leading  cost  category  for  the 
isolated  as  for  the  collectivist  analysis. 

If,  therefore,  there  be  among  the  collectivist  estates  land  adapted 
solely  to  one  line  of  production  —  mineral  lands,  for  example,  or 
salt  marsh,  or  cranberry  swamps,  —  there  may  be  no  alternative 
productivity  of  the  land  to  be  computed  as  resistance  to  the  land  use. 
Productivity  of  the  land  there  is,  possibly  in  a  marked  degree,  but 
all  the  costs  in  the  case  are  to  be  sought  on  the  side  of  the  labor  or 

1  Collectivism  is  a  term  broader  and  less  definite  than  either 
socialism  6r  commu7iism,  and  includes  the  two.  It  means  some 
sort  of  general  social  partnership  in  economic  affairs. 


SUPPLY  AND   COST  63 

of  the  machinery  or  of  the  raw  materials  applied.  So,  when  once 
any  sort  of  machinery  for  any  use  is  in  existence,  the  cost  analysis 
points  not  to  the  labor  applied  in  producing  it  but  to  its  best  alterna- 
tive use.  And  even  in  the  forward  looking  view,  when  the  making 
of  machinery  is  under  consideration,  the  same  analysis  probably 
holds;  for,  presumably,  the  advantages  from  its  use,  even  in  its 
second  possible  employment,  are  great  enough  to  outweigh  the  cost 
of  its  construction.  And  in  turn,  the  original  cost  of  construction 
may  lie,  in  the  larger  part  or  entirely,  in  the  displacement,  not  of 
goods  for  consumption,  l)ut  of  other  possible  equipment  goods. 

And  in  the  case  of  labor,  also,  the  cost  in  a  collectivist  society 
—  either  socialistic  or  communistic  —  would  ordinarily  be  the 
alternative  product  of  the  labor  rather  than  in  the  labor  burden 
itself.  Especially  is  this  likely  to  be  true  of  the  more  skilled  varie- 
ties of  labor ;  up  to  the  point,  at  least,  where  the  day's-end  margin  of 
weariness  applies.  And  even  here,  the  cost  is  commonly  in  large 
measure  the  displacement  of  the  positive  advantages  of  recreation, 
rather  than  solely  in  the  pain  significance  of  further  effort.  Thus 
opporhinity  cost,  broadly  interpreted,  applies  in  greater  or  less  de- 
gree to  all  cases  where  alternatives  of  product  or  of  other  advantage 
are  open.  The  line  of  least  resistance  in  economic  productivity  is 
almost  inevitably,  therefore,  in  some  part  or  entirely,  the  line  of  the 
strongest  pull. 

Thus  the  principle  of  selection  in  the  working  out  of  the  division 
of  labor  in  a  collectivist  society  is  the  principle  of  the  line  of  least 
sacrifice  —  the  same  principle,  in  fact,  that  presides  over  the  direc- 
tion of  purchasing  power  in  the  market  in  the  individual's  choice  of 
what  he  shall  buy. 

Competitive  costs.  —  To  assert  that  with  most  goods  the 
supply  is  limited  through  the  influence  of  cost  of  production 
is  merely  another  way  of  saying  that  we  have  rarely  to  do 
with  goods  present  in  fixed  and  inelastic  stocks.  Likewise 
it  is  a  way  of  asserting  that  such  goods  as  are  forthcoming 
present  themselves  with  reservation,  or  refusal,  prices 
attached.  And  if  these  be  not  attached  to  the  products 
when  once  they  are  produced,  they  are  attached  as  a  condi- 
tion to  the  continued  forthcoming  of  the  products.  Costs 
of  production  are,  therefore,  as  between  producers  and  con- 
sumers, the  analogue  of  reservation  prices  as  between  sellers 
and  buyers.  And  this,  in  turn,  means  that  cost  of  produc- 
tion as  bearing  upon  market  price  points  really  to  cost  of 


64  rill'J  KCOXOMICS  OF  ENTERPRISE 

reproduction,  to  that  necessary  price-indemnity,  for  any  item 
or  volume  of  products,  below  which  that  production  will  not 
be  maintained.  Our  analysis  of  the  fixation  of  the  market 
price  as  subjected  to  the  influence  of  cost  of  production  both 
parallels  and  comi^lements,  therefore,  the  earlier  price  analy- 
sis. It  was  therc^  made  clear  that  market  price  is  neither  an 
average  of  price  offers,  nor  of  supply  prices,  nor  of  both  to- 
gether, but  is  commensurate  both  with  the  marginal  price 
offer  and  the  marginal  reservation  price. 

Cost  and  supply :  margins  and  cost.  —  Similarly  where 
the  market  price  is  influenced  by  cost  of  production :  the 
market  price  tends  to  be  commensurate  not  with  cost  of 
production  in  general,  or  in  the  average,  but  only  with  the 
marginal  cost  of  production.  If  the  price  rises,  the  supply 
will  increase ;  if  the  price  falls,  the  supply  will  diminish. 
With  rising  prices  new  producers  with  higher  costs  of  produc- 
tion will  offer  products,  or  producers  already  in  the  market 
will  enlarge  their  output.  The  new  point  of  equilibrium 
between  demand  and  supply  will  be  a  point  at  which  the 
producers  at  highest  cost  —  or  those  portions  of  their  product 
which  are  highest  in  cost  —  are  barely  indemnified  in  the 
selling  price.  Thus  marginal  cost  of  production  and  market 
price  tend  to  be  identicak  But  this  is  not  to  say  that  the 
marginal  cost  of  production  fixes  or  determines  the  price, 
but  only  that  it  tends  to  be  identical  with  the  price.  Equally 
it  tends  to  be  identical  with  the  marginal  price  offer.  It 
is  not  the  result  of  either  to  the  exclusion  of  the  other,  or 
of  both  to  the  exclusion  of  other  items  of  demand  and  supply, 
but  rather  the  result  of  the  entire  supply  over  against  the 
entire  demand.  The  margins  are  points  at  which,  and  not 
by  which,  the  price  is  determined.  For  most  purposes,  in- 
deed, the  marginal  traders  are  more  nearly  results  than  causes. 
It  is  true  that  their  added  weight  may  have  moved  the  price 
from  one  margin  to  another,  but  the  basis  upon  which  they 
build  and  to  which  they  add  is  made  up  of  countless  other 
demands  in  face  of  countless  other  offers. 

What  the  marginal  analysis  is  good  for.  —  And  note  once  again 
that  this  is  in  no  sense  to  deny  the  important  service  of  the  marginal 


SUPPLY   AND   COST  65 

method.  Only  by  the  precise  analysis  of  what  is  characteristic  in 
marginal  relations  does  the  ready  and  sensitive  response  of  price  to 
the  influence  either  of  demand  or  of  supply  become  intelligible ;  for 
only  so  does  a  rational  and  detailed  account  of  the  ultimate  relations 
of  demand  and  supply  become  possible. 

And  here,  also,  it  is  to  be  admitted  that  our  demand  schedules  and 
our  supply  schedules,  as  an  account  of  the  process  of  market  ad- 
justment, necessarily  somewhat  oversimplify  the  concrete  phenom- 
ena. We  assume  for  the  schematic  purpose  that  all  the  items  of 
supply  are  of  precisely  the  same  quality.  We  assume  a  degree 
of  care  and  accuracy  and  knowledge  on  the  part  of  the  traders 
which  is  not  always  present  even  in  the  wholesale  markets.  And  we 
assume,  as  in  the  earlier  price  analj'sis,  a  one-price  market  re- 
sultant ;  we  assume,  that  is,  a  perfect  market. 

Marginal  cost,  opportunity,  and  profit.  —  How  then  does 
the  producer  for  the  market  compute  the  costs?  And  of 
what  elements  are  his  costs  made  up?  And  what  facts  ren- 
der a  producer  marginal  ?  Or  render  any  part  of  his  product 
a  marginal  product  ? 

The  main  factors  in  the  computation  of  costs,  and  the 
terminology  appropriate  to  the  cost  analysis,  may  be  presented 
in  some  simple  illustrative  problems  : 

Why  not  study  Hebrew?  Evidently  not  that  it  would 
be  entirely  useless,  but  that  something  else  would  be  better 
worth  while.  What  do  you  intend  to  do  for  a  living?  Why 
not  something  else  ?  Nothing  else  offers  equal  inducements, 
all  things  considered  :  what  is  displaced  by  the  chosen  occu- 
pation is  less  than  its  product.  And  why  do  you  not  raise 
rye  exclusively  instead  of  so  much  wheat?  The  rye  would 
displace  a  greater  value  in  wheat  than  it  would  render  in 
rye.  Why  not  raise  silk  in  the  United  States  or  bananas  in 
Canada?  True,  either  thing  could  be  done  were  there 
nothing  else  to  do,  but  other  things  pay  better.  The 
cost  computation  especially  concerns  itself  with  these  other 
things. 

Again :  a  farmer  owns  a  farm  worth  $1000,  machinery 
and  stock  worth  $1000,  hires  a  man  at  $300  for  the  season, 
himself  works,  and  gets  $1000  for  his  crop.  What  is  his 
cost  ?    What  his  profit  ?     Allow,  say,  $200  for  rent  on  land 


66  THE  ECONOMICS  OF  ENTERPRISE 

marhinory  and  .stock  (or  for  interest  upon  S2000  of  capital, 
together  witli  the  deterioration  and  ui)keep)  ;  add  S300 
for  wage  outlays.  The  farmer's  remuneration  for  his  own 
productive  effort  is  the  remaining  S500  —  his  profit.  But 
the  data  are  insufficient  for  determining  the  cost.  We  do 
not  know  for  how  much  the  farmer's  own  labor  should  count 
as  cost  in  the  problem. 

A  carpenter  takes  the  contract  for  the  carpenter  work  on  a 
building  for  §1400,  works  six  months  himself,  and  pays  his 
men  S800.  It  costs  him  $300  to  live  during  the  six  months. 
He  might  have  worked  by  the  day,  receiving  S400  in  wages. 
What  is  his  cost?  What  his  profit?  The  living  expenses 
are  irrelevant  either  to  cost  or  to  profit.  Some  men  live 
out  of  their  profits  as  others  out  of  wages  or  rents  or  interest 
—  unless,  indeed,  the  living  expenses  outrun  the  income. 
It  is  in  this  last  case  true  merely  that  the  wages,  or  the  profits, 
fail  to  cover  the  living  expenses.  Profits  are  none  the  less 
profits  because  they  are  spent  or  overspent.  You  would 
not  say  that  you  got  no  berries  because  you  ate  them,  or 
no  wages  because  you  spent  them.  Wages  and  profits  are 
merely  different  ways  in  which  human  gainful  activity  gets 
rewarded.  But  wages  imply  an  employer  to  pay  them. 
Profits  are  the  reward  of  the  self-employed  worker.  Paying 
out  $800  of  wages  leaves  the  contractor  $600  for  his  own 
labor,  supervisory  or  other.  $600  then  is  his  profit.  But 
what  was  his  cost  ?  It  was  $800  of  outlay  plus  $400  of  dis- 
placed earnings.  His  profits,  that  is  to  say,  are  $200  more 
than  his  necessary  profits.  Profits  are  not  the  excess  above 
cost ;  they  divide  into  necessary  profit  —  that  which  is  part 
of  cost  —  and  unnecessary  profit  —  that  which  is  a  differ- 
ential above  cost.  Had  the  contract  price  for  the  work  been 
$1100  instead  of  $1400,  the  profit  would  have  been  $300, 
falling  $100  below  the  cost  requirement,  —  $100  short  of  the 
minimum  profit.  It  is  thus  possible  to  have  absolute  profit 
and  relative  loss  —  possible,  that  is  to  say,  to  have  a  profit 
less  than  the  necessary  profit.  Cost  of  production  takes 
account  of  this  relative  aspect  of  the  enterprise.  It  is  the 
necessary  indemnity.  And  now  we  are  ready  for  the  niceties 
of  the  complete  and  accurate  analysis. 


SUPPLY  AND  COST  67 

The  various  factors  in  cost.  —  Each  producer,  estimating 
as  best  he  may  the  prices  which  various  products  will  bring, 
has  before  him  the  problem  of  selecting  a  particular  line  of 
production,  or  the  problem  whether  or  not  to  remain  in  his 
existing  line,  and  the  further  problem,  also,  of  how  to  produce 
most  cheaply  the  product  which  he  elects.  Suppose,  for 
example,  that  he  undertakes  the  production  of  wheat.  He 
will  need  seed,  fertilizers,  labor,  and  different  sorts  of  pro- 
duction goods  —  land,  machines,  tools.  He  will  have  taxes 
to  pay,  and  insurance  —  excepting  so  far  as  he  may  carry 
his  own  risks,  —  and  various  minor  outlays.  He  may  have 
to  borrow  from  the  bank  or  from  the  money  lender ;  in  any 
case  he  will  have  to  reckon  a  rate  of  compensation  upon 
the  various  portions  of  his  investment  for  such  periods  as 
his  enterprise  shuts  him  out  of  an  alternative  investment. 
He  may,  also,  have  to  include  some  indemnity  for  risks  that 
his  insurance  policies  do  not  cover.  And  finally,  he  must 
compute  as  a  further  cost  that  compensation  for  his  own  time 
and  effort  below  which  he  cannot  afford  to  remain  in  this 
line  of  production. 

And  now  for  a  few  definitions  —  together  with  the  repetition  of 
some  of  the  old  : 

The  entrepreneur  is  the  independent,  unemployed  manager ;  the 
one  who  carries  the  risks  and  claims  the  gains  of  the  enterprise. 

Compensation  for  hired  labor  is  xoages  (or  salary).  Compensa- 
tion for  the  entrepreneur  is  -profit.  The  hire  for  borrowed  funds  is 
interest  in  one  of  its  manifestations.  The  hires  for  lands  and  tools 
and  machinery  are  rents.  Rents,  interest,  wages,  and  such  neces- 
sary profit  as  serves  merely  to  indemnify  the  entrepreneur  for 
entering  or  continuing  the  enterprise,  are  commonly  regarded  as  the 
main  and  typical  components  of  the  total  cost  of  production  to  the 
entrepreneur. 

Obviously,  however,  the  rents  on  his  own  equipment  must  be 
computed  as  cost ;  since  he  could  have  lent  them  out  for  hire,  or, 
selling  them,  have  lent  out  the  price.  Thus  we  include  in  cost  a 
rental  charge  (together  with  upkeep  charges)  upon  the  equipment 
goods  of  the  entrepreneur.  Or  this  same  amount  may  be  arrived 
at  through  computing  an  interest  charge,  a  percentage  upon  the 
total  amount  of  equipment  reduced  to  a  money  denominator  and 
regarded  as  a  sum  of  capital.     And  another  interest  charge  must 


OS  THE  ECONOMICS  OF  ENTERPRISE 

also  be  couiinitod  —  a  souu'tliins  which  has  nut  its  alternative  state- 
ment in  terms  of  rent :  whatever  outlays  the  cntreprencnir  has  made 
have  had  each  its  date,  early  or  late,  with  reference  to  the  time  of 
marketing  the  product:  the  interest  cost  is,  therefore,  to  be  com- 
puted on  these.  Likewise  the  rentals  which,  by  virtue  of  his  under- 
taking, he  has  foregone,  have  to  receive  each  its  hyjiothctical  date 
of  maturity  and  its  s(>parate  allowance  for  interest  from  that  date 
to  the  date  of  marketing  the  product. 

A  typical  cost  account.  —  Thus  the  cost  account  against  a 
$3000  normal  croj)  of  wheat  marketed  on  Jan.  1,  1911,  from 
a  tract  of  land  of  200  acres  would  look  somethmg  as  follows : 

(1)  Rent  on  200  acres  of  land  at  $3  per  acre  (or  inter- 

est upon  a  $10,000  investment  in  land  at  6  % 
annually)  i  $600 

(2)  Interest  on  $600  from  Oct.   1,   1910,  to  Jan.   1, 

1911  (it  being  assumed  that  the  rent  would 
have  been  due  at  this  date  if  the  land  had  been 
rented)  9 

(3)  Rent  on  machinery  and  stock  (or  interest  on  $2000, 

total  value  of  same,  from  April  1,  1910),  8  mos.  80 

(4)  Wages  for  month  of  April  paid  to  men  May  1st  100 

(5)  Interest  on  same,  8  months  4 

(6)  Seed  and  fertilizer  as  of  May  1st  500 

(7)  Interest  on  same,  7  months  17.50 

(8)  June,  Julj^,  and  Aug.,  etc.  wages  300 

(9)  Interest  on  same,  total  7.50 

(10)  Hail  insurance  for  three  months,  paid  May  1st  50 

(11)  Interest  on  same,  8  months  2 

(12)  Taxes  on  land,  paid  Nov.  1st  100 

(13)  Interest  on  same,  two  months  1 

(14)  Repairs  and  depreciation  on  machinery  and  horses 

as  of  Jan.  1,  1911  112.25 

(15)  Depreciation  of  land  as  of  Jan.  1,  1911  100 

Amount  carried  forward  $1983.25 

^  There  is  inaccuracy  involved  with  item  (1)  and  with  the  similar 
items,  to  the  extent  that  the  displaced  use  may  be  —  and  generally 
is  —  somewhat  greater  than  the  rent  paid  out  or  the  rent  foregone. 
But  these  inevitable  inaccuracies  are  cared  for  under  item  23  below 
—  the  displaced  personal  earnings.  The  computation  of  aggi-egate 
costs  does  not  involve  a  precise  aUoeation  of  the  separate  and 
specific  productivities.  Nor  indeed,  as  we  shall  later  see,  is  such 
accuracy  possible. 


SUPPLY  AND  COST  69 

Amount  carried  forward  $1983.25 

(16)  Outlay  for  hired  teams,  averaged,  as  of  June  1st  100 

(17)  Interest  on  same  for  7  months  3.50 

(18)  Rents  on  hired  machinery,  etc.,  paid  Sept.  1st  100 

(19)  Interest  on  same,  4  months  1.50 

(20)  Threshing  bill,  Sept.  15  100 

(21)  Interest  on  same,  3|  months  1.75 

(22)  Risk  by  drought,  etc.,  —  other  than  hail  200 

(23)  Value  of  entrepreneur's  own  time  and  supervision 

as  of  Jan.  1,  1911  (based  upon  alternative  per- 
sonal earnings  purely,  perhaps  as  wage  earner, 

or  in  no  matter  what  best  alternative)  700 

Total  $3190.00 

Add  also,  say,  ten  dollars  for  general  interest  on  a  vary- 
ing margin  of  funds,  necessarily  kept  on  hand  in  the  con- 
duct of  the  business,  and  not  accounted  for  in  the  separate 
and  specific  interest  charges  above. 


That  is  to  say,  the  crop  which  this  farmer  has  marketed  at 
—  and  upon  which  he  has  actually  paid  out 

$500  of  wages  during  the  summer 
50  of  insurance  in  May 
100  for  taxes,  Nov.  1st 
100  for  rented  appliances  in  Aug. 
100  for  threshing  in  Sept., 

a  total  of  $850  —  has  really  cost  him  $3190.00,  —  $190.00  more 
than  he  has  sold  it  for.  Looldng  back  upon  the  question  in  the 
light  of  his  present  knowledge,  he  would  better  have  done  something 
else.  Looking  forward  —  if  this  experience  seems  to  point  to  a 
similar  experience  with  wheat  in  the  future,  and  to  point  also  to 
similarly  attractive  alternative  openings,  —  he  will  decide  that  he 
would  better  either  abandon  or  modify  the  production  of  wheat. 
Perhaps  his  costs  on  only  some  part  of  his  total  output  were  too 
high ;  perhaps  his  costs  per  bushel  were  too  large  because  his  busi- 
ness was  too  small.  But  assuming  that  his  methods  were  the  best 
methods  open  to  him  in  wheat  production,  he  will  more  or  less  radi- 
cally restrict  his  output. 

The  cost  computation  concerns  only  the  future  supply.  — 

Note  now  that  even  when  the  computation  of  cost  of  pro- 
duction appears  to  be  a  backward-looking  computation,  it 


70  THE  ECONOMICS  OF  ENTERPRISE 

is  only  iis  a  basis  for  a  furtlicr  ami  forwartl  looking  computa- 
tion. Costs  that  have  been,  have  no  direct  bearing  upon 
present  price.  The  supply  is  as  it  is,  no  matter  what  the 
costs  are  now  seen  to  have  been.  The  cost  of  production 
that  is  really  and  ultimately  significant  in  modifying  price 
is  the  prospective  cost  as  over  against  the  prospective  price. 
And  in  most  occupations  the  computation  is  for  a  fairly 
long  term  —  a  season,  or  a  succession  of  years,  or  even  a 
lifetime.  The  bearing  of  cost,  such  as  it  is  —  and  however 
tardy  is  its  working  on  the  volume  of  supply,  —  is  signifi- 
cant only  for  such  persons  as  undertake  the  cost,  and  for 
the  supply  which  it  affects,  and  for  the  period  upon  which 
it  bears.  Prices  are  influenced  by  it  by  virtue  of  the  fact 
that  there  are  always  enough  marginal  men  in  any  competi- 
tive production  to  bring  about  a  reduction  of  the  supply, 
if  the  relative  advantages  of  the  industry  appear  likely  to 
suffer.  And  there  are  always  men  in  other  industries,  near 
to  their  respective  margins,  who  will  be  attracted  to  any 
particular  industry  if  its  relative  advantages  appreciably 
increase. 

Cost  sums  up  all  resistances  under  the  price  denominator.  — 
There  is  danger,  however,  that  in  some  cases  this  principle  of  oppor- 
tunity costs  may  be  overemphasized.  A  cost  computation  that  is 
adequate  and  exhaustive  must  reduce  to  the  price  denominator  all 
of  the  different  resistances  which  bear  on  the  case.  If  the  line  of 
production  or  the  particular  item  of  product  under  consideration 
involves  an  especial  degree  of  hardship,  or  danger,  or  ill  repute,  the 
necessary  indemnity  is  often  appreciably  the  greater.  Pain  costs 
and  disrepute  costs  and  danger  costs  may  require  to  be  reduced  to 
the  common  denominator  of  price,  as  making  part  of  the  total  cost 
expressed  in  price  as  a  sum  of  the  price  resistances.  The  saloon  busi- 
ness, for  example,  and  the  business  of  safe-cracking,  probably  bring 
returns  out  of  proportion  to  the  skill  and  effort  invested  in  them.  So 
some  fields  of  teaching,  by  their  freedom  from  stress  and  care  and 
by  the  interesting  quahty  of  the  work,  may  offer  remunerations 
considerably  short  of  proportional  to  the  expenses  of  preparation  and 
to  the  abihty  which  they  require.  These  relative  advantages,  or 
disadvantages,  inasmuch  and  in  so  far  as  they  bear  upon  costs, 
affect  prices  in  the  same  way  that  all  other  costs  affect  prices,  namely, 
through  influencing  the  volume  of  supply. 


SUPPLY  AND  COST  71 

Which  is  fundamental  to  price  —  cost  or  demand?  —  We 

arc  now  in  a  position  to  resolve  a  famous  and  long-standing 
controversy  in  economic  theory :  Is  price  more  dependent 
upon  utility  than  upon  cost  —  upon  demand  forces  than 
upon  supply  forces  —  upon  marginal  utility  than  upon  mar- 
ginal cost ;  or  is  it  equally  dependent  upon  both  ?  It  may  be 
truly  said  that  the  dependence  is  equally  upon  both,  that 
price  is  the  equating  point  between  the  two  sides  of  the 
price  equation ;  but  it  is  still  open  to  urge  upon  the  demand 
side  of  the  argument  that,  after  all,  there  could  be  no  motive 
for  production  if  there  were  no  wants  to  be  satisfied,  and 
that  there  could  be  no  justification  for  cost  if  there  were 
no  demand  for  the  product.  Surely  it  must  be  admitted 
that  human  wants  are  the  dynamic  facts  behind  all  economic 
activity.  In  the  main,  then,  the  primacy  is  with  the  de- 
mand side,  although  this  is  not  to  deny  the  importance  — 
the  secondary  importance  —  of  supply ;  for  if  there  were 
no  limit  upon  production,  no  price  could  attach  to  the  prod- 
uct. The  market  price,  in  this  view  of  it,  appears  to  offer 
a  precise  analogy  to  the  point  of  adjustment  reached  when 
a  coiled  spring  is  pushed :  action  and  reaction  are  equal, 
but  the  resistance  is  merely  another  aspect  of  the  original 
pressure,  a  reflex  from  it.  The  push  is  still  the  primary 
fact.  Where  the  point  of  new  adjustment  is  found  depends 
upon  the  strength  of  the  push. 

But  the  advocate  of  the  supply  side  of  the  argument 
emphasizes  cost  of  production,  and  asks  whether  the  point 
is  not  equally  a  matter  of  the  strength  of  the  spring.  With- 
out questioning  the  fact  that  the  original  force  in  economic 
production  and  in  market  adjustments  is  this  fact  of  human 
desire,  one  may  still  deny  that,  in  the  actual  determination 
of  price,  demand  is  of  more  importance  than  supply.  True 
it  is  that  useful  things  external  to  man  are  objects  of  his 
desire ;  they  furnish  service,  afford  satisfaction,  or  protect 
from  discomfort.  If  sacrifice  is  a  condition  to  their  enjoy- 
ment, they  command  sacrifice.  But  it  still  stands  as  true 
that  things  have  not  prices  proportionate  to  their  utilities. 
Price  comes  about  only  when  there  is  resistance  to  be  over- 
come ;    when  there  is  a  disparity  between  desires  and  the 


72  THE  ECONOMICS  OF  ENTERPRISE 

moans  to  their  satisfaction.  Is  not  value,  then,  or  price, 
more  nearly  a  measure  of  the  scarcity  of  things  than  of  their 
usefulness?  Value,  or  price,  appears  to  emerge  in  human 
life  only  when  obstacles  and  difliculties  are  found  in  the 
path  of  enjoyment;  when  satisfactions  are  saddled  with 
burdens  ;  when  needs  impose  something  to  be  avoided.  We 
are  richer  in  our  rainfalls  than  in  our  irrigation  ditches ;  and 
we  should  be  still  better  off  were  these  rainfalls  not  so  scant. 
\'alue  arises  when  things  cost.  Human  interests  are  for- 
warded by  plenty  rather  than  by  scarcity  —  are  antagonistic 
to  value  rather  than  in  harmony  with  it.  Economic  prog- 
ress, therefore,  must  express  itself  in  successive  reductions 
of  the  sacrifices  necessary  to  the  satisfaction  of  desire,  in 
the  approach  of  commodities  to  the  margin  where  value  and 
price  disappear  —  in  short,  in  the  cheapening  of  things.  A 
short  crop  commonly  sells  for  more  than  an  abundant  crop. 
The  destruction  of  the  shipload  of  spices  was  a  creation  of 
value  —  not  of  spices.  That  water  or  air  should  become 
so  valuable  as  to  command  a  price  would  mean  that  society 
had  essentially  lost  rather  than  gained  in  weal.  Value, 
therefore,  appears  to  connote  sacrifice  rather  than  well-being. 

Opposing  demands  are  bases  of  costs.  —  But  no  matter 
which  side  of  this  controversy  shall  seem  to  present  the  more 
appealing  case,  the  whole  issue  must  be  declared  to  be  merely 
apparent  and  ultimately  meaningless.  Recalling  the  fact 
that  in  the  analysis  of  demand  and  supply  the  marginal 
price-demand  was  a  case  of  indifTerence  between  two  com- 
peting marginal  utilities,  and  that  the  reservation  price  of 
the  seller  was  itself  an  expression  of  demand  — •  the  point 
at  which,  with  a  falling  price,  the  thing  in  hand  was  equal 
in  desirability  to  something  else  obtainable  through  that 
price  —  the  case  begins  to  look  like  an  inquiry  whether  the 
demands  of  buyers  are  more  important  to  price  than  are 
the  demands  of  sellers. 

But  with  the  introduction  of  cost-of-production  infiuences, 
and  with  cost  of  production  correctly  interpreted,  the  last 
necessary  step  in  the  argument  is  taken.  So  far  as  it  is  not 
direct  outlay,  the  cost  or  refusal  price  is,  in  the  main,  the 
resisting   appeal   of   competing   opportunities.     The   direct 


SUPPLY  AND   COST  73 

outlays,  also,  commonly  have  alternative  openings  for  gain. 
Resolving  this  refusal  price  into  the  compensations  offered 
by  other  employments,  or  into  the  advantages  of  alternative 
activities,  price  is  recognized  as  the  equating  point  between 
opposing  demands.  The  cost  computation  of  the  entre- 
preneur is  merely  his  way  of  arriving  at  a  decision  as  to  what 
commodity  he  shall  best  produce.  It  is  a  choice  as  to  which 
demand  offers  the  largest  inducement.  Marginality  in 
production  means  that  an  equality  of  advantages  exists 
between  the  two  most  attractive  alternatives. 

Thus  viewed,  the  supply  of  goods  of  any  one  kind  appears 
as  a  flow  of  items  with  definite,  though  changing,  reservation 
limits  attached  to  their  forthcoming.  These  limits  are  in 
the  main  given  by  the  price  demand  for  other  products ; 
that  is  to  say,  the  various  costs  of  the  entrepreneur  are 
mostly  to  be  explained  as  the  wages  imposed  by  other  lines 
of  production  —  the  rents  obtainable  in  other  fields  of  enter- 
prise, the  interest  charge  which  capital  commands  because 
of  the  other  enterprises  in  which  it  can  invest.  All  along 
the  line,  cost  for  one  thing  traces  back  to  demand  for  other 
things ;  and  even  for  instruments  of  production  that  have 
only  one  line  of  application,  the  cost  to  any  one  entrepreneur 
is  explained  by  the  competing  demands  of  other  entrepre- 
neurs. There  is,  therefore,  no  issue  between  demand  and 
cost,  simply  because  cost  mostly  resolves  itself  into  compet- 
ing and  resisting  demands.  It  was  indeed  partly  for  the 
purpose  of  this  particular  problem  that  some  pages  back 
the  reservation  prices  of  the  sellers  were  shown  to  be  them- 
selves demands. 

We  now  see  that  commonly  and  mainly  the  refusal  prices 
of  products,  the  costs,  are  likewise  demand  facts.  But 
they  are  none  the  less  costs.  The  difficulty  with  the  older 
view  of  cost  of  production  was  in  its  attempt  to  reduce  all 
costs  to  labor  or  to  effort,  —  to  assume,  for  example,  that 
value  has  its  basis  solely  in  one  sort  of  sacrifice,  labor  —  and 
that  the  displacement  of  alternative  products  has  no  signifi- 
cance as  cost.  Thus,  for  example,  it  was  believed  that  the 
rent  of  land,  land  not  tracing  its  existence  to  labor,  could 
have  no  place  in  cost.     But  more  of  this  later. 


74  THE  ECONOMICS  OF  ENTERPRISE 

Economic  influences  focus  in  cost.  —  Wo  arc  now  prc- 
paretl  to  grasp  the  trutli  that  cost  of  production,  so  far  from 
bcinjj;  a  plicnomcnon  simj^lc,  ultiniato,  and  fnn^  from  diffi- 
culty, is  rather  to  be  ref2;arded  as  the  i)oint  at  which  a  be- 
wihUM-injj;  compU^xity  of  influences  are  summed  up  in  one 
resultant ;  it  is  the  effect  and  expression  of  many  contribu- 
tory causes.  To  the  entrepreneur,  the  method  of  computa- 
tion is,  indeed,  sim]ile  enough,  even  though  the  weight  to 
be  given  to  each  of  the  different  elements  in  the  problem 
may  be  far  from  exact.  Doubtless  many  of  the  data  upon 
which  he  must  act  are  rather  estimates  than  precise  facts. 
For  example,  many  of  his  costs  are,  at  the  inception  of  his 
undertaking,  not  determinate.  The  various  markets  in 
which  he  must  hire  or  buy  are  fluctuating  in  their  prices. 
And  the  price  at  which  he  will  finally  market  his  product  is 
uncertain.  He  has  to  guess  as  best  he  can.  Rain  and 
drought  and  moth  and  rust  and  countless  other  contingencies 
—  changed  rates  of  interest,  strikes,  blockades,  financial 
disturbances  —  are  all  possibilities.  His  alternative  lines 
of  activity,  also,  are  subject  to  like  uncertainties.  He  esti- 
mates and  surmises  and  hazards  where  he  cannot  know,  and 
as  a  sort  of  general  summary,  setting  many  things  over 
against  many  others,  he  decides  upon  his  line  of  largest 
net  advantage,  making  often  not  better  than  a  rough  guess, 
but,  none  the  less,  a  decision. 

But  nevertheless  for  him  the  case  is  relatively  simple. 
He  takes  wages  as  he  finds  them,  rents  as  the  market  presents 
them,  interest  rates  as  he  must  pay  them,  and  so  on,  and  gets 
what  gain  he  can.  It  is  no  part  of  his  problem  to  investigate 
the  causes  of  the  prices  attaching  to  the  different  items  of 
his  cost  outlay  or  attaching  to  his  alternative  lines  of  pro- 
duction. These  are  as  they  are ;  and  as  it  does  not  lie  with 
him  to  change  them,  but  only  to  adjust  himself  to  them, 
he  would  merely  waste  his  energies  as  entrepreneur  — 
becoming  mere  scientist  —  were  he  to  set  himself  curiously 
to  searching  out  the  underlying  explanations  for  what  he 
finds  to  be  unalterable.  His  view  of  the  facts  is  adequate 
only  for  the  particular  problem  that  he  has  to  face.  Cost 
of  production,  as  he  sees  it,  explains  the  fact  that  he  pro- 


SUPPLY  AND   COST  75 

duces  a  certain  line  of  commodities,  and  the  degree  of  his 
production,  only  on  terms  of  taking  for  granted  all  the  other 
facts  and  influences  as  the  data  for  his  particular  problem. 

Cost  in  economic  analysis.  —  The  economist,  on  the  other 
hand,  must  recognize  that  marginal  cost  of  production  is 
important  to  the  price  problem  only  as  the  meeting  and  the 
adjusting  point  of  a  wide  and  constantly  changing  variety 
of  influences.  There  are  changes  in  the  desires  and  needs 
for  the  particular  commodity,  for  example,  wheat ;  changes 
in  the  desires  for  the  other  products  competing  to  attract 
the  purchasing  power  of  all  the  different  purchasers ;  changes 
in  the  technique  of  production  of  all  the  different  competing 
products ;  changes  in  the  sources  of  supply  of  all  the  different 
raw  materials  —  fuel  getting  cheaper  or  dearer,  mines  ap- 
proaching exhaustion,  new  deposits  discovered,  new  supplies 
made  accessible  by  new  lines  of  transportation,  and  made 
dearer  or  cheaper  through  dearer  or  cheaper  transportation 
—  a  great  moving  equilibrium  of  diverse  change.  Margi- 
nal cost  of  production  is  for  each  particular  class  of  goods 
the  summing  up  and  the  manifestation,  as  a  price  total,  of 
all  these  different  influences  focusing  upon  the  particular 
good  in  question.  The  flexibility  of  cost  —  its  sensitive 
response  to  each  and  all  of  the  changes  in  the  conditions  or 
in  the  forces  involved  in  the  situation  —  makes  cost  as  the 
focusing  point  of  all  of  these,  the  strategic  point  from  which 
all  of  these  are  most  effectively  studied.  But  it  does  not 
explain,  excepting  in  the  sense  that,  as  looked  at  from  the 
point  of  view  of  the  entrepreneur,  it  explains  the  degree 
and  the  direction  of  his  activity. 

It  is  possible  that  the  fundamental  principle  of  cost  of  production 
may  receive  some  illumination  through  a  slight  change  in  point  of 
view: 

How  much  an  individual,  or  any  society  as  an  aggregate,  will  pro- 
duce of  any  one  good,  out  of  the  aggregate  of  goods  produced,  de- 
pends, in  some  part,  upon  the  intensity  and  the  extent  of  the  desire 
for  other  things.  Land  or  labor  or  machines  may  be  so  much  the 
less  plenty  for  some  products  as  they  are  the  more  needed  for  other 
products.  The  relative  difficulty  of  producing  things  is  funda- 
mentally conditioned  upon  the  relative  equipment  of  human  pro- 


76  THE  ECONOMICS  OF  ENTERPRISE 

ductivc  powi-r,  tlie  aiuDimt  and  the  kiiul  of  labor  efficiency  together 
with  the  amount  and  the  kind  of  external  equipment.  To  say  that 
the  value  of  a  commodity  is  high  because  the  cost  of  producing  it  is 
liigh,  still  leaves  it  to  be  explained  why  this  cost  is  high.  In  a 
competitive-entrepreneur  society  hke  our  own,  where  products 
have  market  prices,  and  wliere  the  various  agents  and  instruments 
of  production  have  their  various  respective  rewards  in  wages,  or 
rents,  or  the  like,  it  is  the  comparative  scarcity  of  these  productive 
efficiencies  —  all  the  while,  of  course,  relatively  to  the  disposition  to 
pay  for  the  products  —  that  ultimately  explains  how  all  these 
different  productive  factors  function  as  bases  of  cost  of  production 
in  the  competitive  productive  process.  That  is  to  say,  —  as  will 
later  more  fully  appear,  —  cost  of  production,  as  an  explanation  of 
price,  amounts  to  nothing  better  than  an  explanation  of  the  price 
of  the  product  by  the  prices  of  the  tilings  that  go  to  produce  it. 
These  underlying  and  contributing  items  of  price  call,  also,  each 
severally,  for  its  explanation.  The  various  items  in  the  total  cost 
of  production  are  the  price  form  and  guise  in  which  these  ultimate 
facts  of  human  need  and  of  human  activity  and  of  environmental 
equipment  present  and  manifest  themselves  to  the  producer  of 
goods  for  the  market. 

It  may,  indeed,  be  rightly  argued  that  the  present  comparative 
scarcity  of  these  productive  efficiencies  is  the  result  of  preceding 
market  adjustments  —  that  these  productive  efficiencies  are  them- 
selves, many  of  them,  merely  earfier  produced  goods,  and  that 
since  each  single  piece  of  equipment,  or  each  item  of  labor,  already 
stands  in  a  price  relation  to  everj^  other  piece  of  equipment  or  item 
of  labor,  it  is  therefore  no  adequate  exjDlanation  of  cost  to  appeal 
to  the  existing  supph'-  of  equipment  and  of  labor  as  ultimate. 
And  it  must  be  granted  that  it  is  not  an  ultimate  explanation 
excepting  for  the  purposes  for  which  the  value  theorist  uses  it. 
The  objection  as  urged  points  to  the  hmitations  of  value,  or  price, 
theory  rather  than  to  the  inadequacy  of  the  present  analysis  for 
the  purposes  of  the  price  and  value  problem.  In  the  study  of  the 
market  process,  the  economist  is  interested  in  those  forces  at  work 
tending  to  estabhsh  an  equiUbrium  of  price  under  given  conditions. 
These  conditions  are  made  up  of  certain  situation  facts  which  the 
value  theorist  treats  as  fundamental.  This  situation,  within  which 
the  present  market  forces  are  at  work  and  of  which  the  market  is 
itself  a  part,  might  be  accounted  for  in  terms  of  how  it  developed. 
But  such  a  task,  while  perhaps  not  impossible,  and  while  clearly  of 
much  significance  to  the  economist,  is  not  the  work  of  the  value 


SUPPLY  AND   COST  77 

theorist.  And  until  the  task  is  accompHshed,  he  must  content 
himself  with  assuming  the  conditions  as  they  opaquely  are,  and 
with  treating  as  fundamental  the  situation  as  it  presents  itself. 

Who  and  what  are  marginal  ?  —  Recalling  that  our  pres- 
ent problem  is  the  explanation  of  the  volume  of  the  supply  of 
any  commodity,  that  the  supply  of  many  sorts  of  goods 
cannot  be  increased,  and  that  cost  of  production  interests 
us  solely  in  the  sense  and  to  the  degree  that  it  explains  the 
volume  of  supply,  we  return  to  the  analysis  of  the  influences 
which  set  a  limit  to  the  amount  of  goods  produced  by  each 
entrepreneur.  It  is  in  this  aspect  that  marginality  in  pro- 
duction becomes  important. 

We  have  already  noted  that  when  the  price  of  any  com- 
modity rises,  more  of  it  tends  to  be  produced  —  if,  of  course, 
further  production  is  possible.  No  rise,  however,  is  ever 
great  enough  to  divert  all  industry  into  any  particular  field. 
Nor  will  any  moderate  fall  in  the  price  of  any  commodity 
drive  out  all  of  the  producers  into  other  industries.  Some 
of  the  i)roducers  will  go,  it  is  true,  ])ut  others  will  stay. 
Ordinarily,  however,  those  that  stay  will  somewhat  reduce 
their  output.  Some  undertakings,  that  is  to  say,  are  marginal 
as  wholes  —  are  making  only  enough  to  keep  them  going ; 
while  others  are  variously  distant  from  the  margin  of  aban- 
donment. All,  however,  must  be  recognized  as  marginal 
as  to  some  portion  of  their  product. 

It  is  implied  in  the  foregoing  that,  at  any  given  price  of 
product,  some  of  the  men  and  the  lands  and  the  machines 
employed  in  any  enterprise  are  barely  paying  enough  to 
justify  their  employment,  and  that,  with  every  employed 
agent  or  instrument,  there  must  be  a  point  where  further 
product  will  not  justify  the  further  cost  involved  in  obtain- 
ing it.  This  is  merely  another  way  of  saying  that  in  many 
enterprises  there  are  marginal  factors  in  production,  and  that 
every  factor  must  be  marginal  at  some  point  for  some  frac- 
tion of  the  product  possible  from  it. 

Several  questions,  therefore,  present  themselves  for  exami- 
nation. What  influences  render  an  enterprise  or  an  entre- 
preneur marginal?     When  and  why  do  some  portions  of 


78  THE  ECOXOMICS  OF  ENTERPRISE 

tlio  product  of  the  non-marffinal  enterprise  become  mar- 
ginal? Why  and  when  do  the  various  employed  factors 
reach  each  its  marginal  limit  of  use?  Is  marginality  ulti- 
mately an  instrument  margin  or  a  personal  margin?  And, 
finally,  what  is  the  relation  of  marginality  to  price  ?  in  what 
sense,  that  is,  if  at  all,  does  the  marginal  producer,  or  the 
marginal  factor  in  protluction,  or  the  marginal  item  produced, 
have  an  especial  bearing  upon  the  market  price  of  the 
product  ? 

A  whole  business  may  be  marginal ;  that  is  to  say,  falling 
prices  for  the  product,  or  rising  prices  for  an  alternative 
product,  or  any  other  influences  affecting  the  relative  de- 
sirability of  different  lines  of  production  may  decide  the 
marginal  entrepreneur  to  abandon  entirely  his  existing  line. 

Suppose,  for  illustration,  that  at  a  selling  price  of  $2  per  hat  an 
entrepreneur  is  making  a  profit  of  25  cents  per  hat ;  that  for  every 
hat  now  produced  he  might  for  the  same  outlay  and  trouble  produce 
a  pair  of  shoes  salable  at  SI. 90  —  thus  reaping  15  cents  of  profit 
per  pair  of  shoes.  The  cost  of  hats  for  him  is  then  $1.90  each. 
When  hats  fall  to  this  price  of  $1.90,  he  will  be  a  marginal  producer. 
Fifteen  cents  of  his  profits  in  hats  out  of  his  total  25  cents  of  profit 
is  therefore  necessary  profit.  In  other  words,  15  cents  of  his  profit 
enters  into  cost  of  production,  and  10  cents  of  it  is  a  surplus  above 
cost  of  production  —  unnecessary  profit. 

Had  this  alternative  in  shoes  been  not  $1.90  but  $2,  he  would  have 
been  marginal  in  the  beginning,  although  it  might  at  the  same  time 
be  true  that  his  profit  in  hats  were  outrunning  that  of  any  competing 
manufacturer.  Marginality  in  production  is  therefore  not  a  matter 
of  absolute  gain,  but  only  of  gain  relative  to  the  next  best  alternative. 
It  is  not  always  true,  or  probably  even  commonly  true,  that  it  is  the 
producer  at  lowest  profit  who  is  the  marginal  producer.  Marginal- 
ity is  a  question  of  nearness  to  equality  with  the  next  best  thing. 
The  absolute  amount  of  gain  is  irrelevant.  Marginal  profit,  then,  is 
really  relative  marginal  profit.  That  business  is  nearest  to  the 
margin  that  is  nearest  to  abandonment. 

But  it  is  more  often  the  case  that  only  some  portions  of  the  prod- 
uct of  the  entrepreneur's  business  are  marginal  rather  than  that  his 
entire  product  as  an  aggregate  is  a  marginal  product.  Falling  prices, 
that  is  to  say,  are  more  hkely  to  reduce  the  output  than  entirely  to 
cancel  it.  This  holds  good  equally  in  manufacturing  and  in  agri- 
culture, although  the  illustrations  in  agriculture  may  be  the  more 


SUPPLY  AND   COST  79 

readily  understood.  If  prices  fall  in  agriculture,  the  less  productive 
lands  tend  to  be  abandoned.  These  are  the  lands  upon  the  so- 
called  extensive  margin  —  the  poorest  or  the  most  distant  lands. 
Such  lands  are  practically  rentless  by  virtue  of  the  fact  that  for 
most  men  they  are  barely  worth  cultivating,  or  not  worth  cultivat- 
ing at  all,  at  the  ruling  prices  of  products  ;  thus  no  cultivator  can 
both  afford  and  have  to  pay  an  appreciable  rent.  Similarly  there 
is  for  every  cultivator  an  intensive  marginal  cultivation  on  every 
piece  of  land  that  he  cultivates,  no  matter  how  good.  At  any  level 
of  prices  for  products,  each  piece  of  land  is  cultivated  so  far  as  it 
seems  to  pay.  Cultivation  comes  to  a  stop  at  the  point  where  the 
increased  cost  is  barely  remunerated  in  the  price  of  the  increased 
product.  So  falhng  prices  mean  the  restriction  of  product  on  all 
land  under  cultivation,  no  matter  of  what  grade;  upon  lands 
above  the  margin,  however,  they  mean  not  a  complete  abandonment, 
but  rather  what  amounts,  in  substance,  to  a  partial  abandonment. 
Some  of  the  product  is  not  marginal ;  the  marginality  is  not  of  the 
business  as  a  whole. 

But  certain  conditions  may  affect  the  entire  business  to  make  it 
marginal.  In  agriculture,  as  in  all  gainful  employments,  the  choice 
between  businesses  is  not  always  and  necessarily  a  choice  having 
to  do  solely  with  the  relative  size  of  the  alternative  gains.  The 
relative  painfulness  or  dangerousness  or  ill  repute  or  ill  smell  of  the 
occupation  may  have  to  be  taken  into  account,  in  arriving  at  the 
price  total  which  must  be  had  to  attract  the  entrepreneur  into  the 
business,  or  to  hold  him  there,  once  he  is  in.  So  also  in  every  business 
the  endurance  limit,  or  the  recreation  limit,  or  the  sleep  limit  may 
furnish  a  margin  for  some  items  of  product.  These  influences, 
which  are  non-pecuniary  and  which  yet  demand  pecuniary  indem- 
nity, are,  indeed,  more  often  significant  as  affecting  certain  items  of 
product  rather  than  as  affecting  the  relative  advantages  of  different 
industries  and  the  terms  of  the  choice  between  them. 

But  the  labor-pain  margin  and  the  sundown  margin  of  weariness 
or  of  recreation  can  obviously  have  no  significance  in  deciding  what 
uses  to  make  of  instruments  of  production,  whether  land  or  machin- 
ery. Here  the  margins  are  opportunity  or  outlay  margins  exclu- 
sively. 

Pain  cost  as  marginal  cost.  —  It  must,  then,  appear  not  a  little 
strange  that,  among  all  the  influences  that  tend  to  bring  any  pro- 
ducer to  his  marginal  product,  and  thus  to  limit  the  supply  abso- 
lutely or  relatively  to  other  products,  most  of  the  economists  should 
have  recognized  as  ultimate  and  determinant  only  one,  the  pain- 


80  THE  ECONOMICS  OF  ENTERPRISE 

fulness  of  labor.  For  it  is  clear  that,  even  at  the  day's-end  margin, 
cessation  from  work  is  not  likely  to  be  solely  a  question  of  weariness 
as  against  further  jiroduct.  If  there  is  no  question  of  the  hired  men, 
their  wages  and  their  acquiescence,  there  are  in  any  event  to  be  con- 
sidered the  comfort  and  the  welfare  of  the  work  animals.  Nowhere, 
in  fact,  even  at  sundown,  does  the  labor-i)ain  doctrine  hold  as  the 
sole  influence  in  limiting  the  su])ply  of  products  relatively  to  one 
another,  or  as  limiting  the  supply  of  any  one  product,  or  as  the  sole 
explanation  of  the  wage  outlays  to  be  incurred  in  any  particular 
direction.  Labor  pain  stands  merely  as  one  among  the  many  cost 
resistances  to  be  overcome  by  the  prospective  selling  price.  Our 
wheat-producing  farmer,  as  we  shall  later  more  fully  see,  presents 
at  the  same  time  many  different  supply  margins ;  e.g.  a  rent-outlay 
margin,  a  wage-outlay  margin,  an  indefinite  number  of  seed,  fer- 
tilizer, and  implement  margins,  a  corn-displacement  margin  for 
some  portions  of  his  product,  a  bean-displacement  margin  for  other 
portions,  machine-wear  and  land-wear  margins  for  some  acres  of 
his  crop,  and,  among  all  the  others,  pity  margins  for  his  draft  cattle, 
his  wife,  and  his  children,  a  mixed  decency-and-expediency  margin 
for  Ms  employees,  and,  finally,  a  weariness  margin  for  himself. 
And  all  these  margins  may  be  effective  at  the  same  time  to  set  a 
limit,  in  different  places  and  directions,  to  his  production,  and  might 
conceivably  converge  in  influence  to  dictate  the  non-production  of 
any  particular  line  of  product,  or  of  any  particular  item  of  that 
particular  line.  And  at  different  price  levels  for  products,  and  with 
diiferent  producers,  new  and  different  combinations  of  margins 
would  be  presented ;  different  supply  volumes  have  different  supply 
prices. 

Here  are  surely  margins  enough,  but  there  are  more :  At  the  in- 
tensive margin  the  thing  to  be  decided  is  not  commonly  whether 
one  shall  apply  more  expense,  rather  than  save  or  spend  his  funds, 
but  whether  one  may  not  make  greater  gains  elsewhere.  And 
there  is  the  further  problem  whether  or  not  to  use  more  land  and 
less  machinery,  or  vice  versa,  or  more  or  less  labor  as  against  either  or 
both  of  the  other  classes  of  factors.  Evidently  the  margins  are 
legion ;  and  all  that  we  can  say  from  the  cost  point  of  view  is  that 
any  of  the  factors  of  production  may,  through  a  change  in  the  resist- 
ance attaching  to  it,  become  a  margin-causing  factor,  —  become, 
that  is  to  say,  an  influence  deciding  the  producer  to  modify  or  to 
abandon  his  line  of  gainful  activity. 

Marginality  is  personal.  —  But,  despite  all  this  elabora- 
tion of  the  fact  that  marginality  sometimes  applies  to  the 


SUPPLY  AND   COST  81 

business  as  a  whole,  sometimes  only  to  certain  items  of  equip- 
ment, and  sometimes  only  to  certain  items  of  the  output, 
it  must  not  be  inferred  that  marginality  is  ultimately  a 
marginality  of  things  rather  than  of  persons.  Marginality 
is  a  matter  of  individual  choice.  Whether  it  be  all  of  the 
output  or  only  a  part  of  it  that  is  upon  the  margin,  it  is  in 
any  case  an  output  sought  by  the  entrepreneur  for  ends 
and  purposes  of  his  own;  and  neither  equipment  nor  out- 
put can  be  marginal  otherwise  than  through  his  computa- 
tions and  in  relation  to  his  situation,  his  activities,  and  his 
decisions.  And  precisely  so  again  of  his  instruments  of 
production :  With  falling  prices  any  entrepreneur  may 
transfer  part  or  all  of  his  lands  to  other  products,  or  may  sell 
off  part  or  all  of  his  capital  goods,  or  reduce  his  labor  in- 
vestment, or  restrict  his  borrowing  of  funds;  or  he  may, 
leaving  part  or  all  of  his  investment  undisturbed,  transfer 
part  or  all  of  his  personal  activity  to  his  next  most  attractive 
alternative ;  or  he  may  completely  abandon  the  old  line 
of  activity.  In  this  case  of  abandonment,  also,  he  and  his 
capital  may  hold  together  as  one  business  group  or  complex, 
or  may  scatter  into  various  enterprises ;  with  falling  profits, 
and  possibly  with  failing  pleasure  or  interest  in  the  business, 
or  at  the  approach  of  old  age  or  of  ill  health,  he  may  decide 
to  retire  from  entrepreneur  activity,  reducing  his  possessions 
to  the  form  of  loan-fund  capital.  But  whatever  may  be 
the  modifications  which  result,  they  will  come  about  through 
him  as  a  man  who  has  become  marginal  in  some  or  all  of  his 
activities,  and  no  instrument  will  be  marginal  excepting  in 
its  relation  to  him.  There  is,  in  fact,  no  such  thing  as  a 
marginal  instrument  excepting  in  the  sense  that  it  is  marginal 
relatively  to  an  entrepreneur.  Ultimately,  that  is,  the  mar- 
ginality is  one  of  persons,  not  of  instruments. 

Marginality,  supply,  and  price.  —  And  note  again  that 
marginality,  in  no  matter  what  aspect,  is  important  only 
as  it  affects  the  quantity  of  supply  and,  through  supply, 
affects  the  price  of  the  product.  The  marginal  item  in  the 
product  of  any  entrepreneur  is  that  item  which  sells  for 
barely  enough  to  cover  the  extra  cost  which  it  imposes. 
Any  instrument  is  marginal  when  the  further  product  ob- 


82  THE  ECONOMICS  OF  ENTERPRISE 

tained  with  it  or  upon  it  sells  for  only  enough  to  cover  the 
costs  of  the  other  factors  of  production  that  go  with  it. 
Any  grade  of  land,  for  example,  is  at  the  extensive  margin 
when  the  cultivator  finds  that  the  product  sells  for  barely 
enough  to  make  the  production  worth  while.  The  culti- 
vation of  any  piece  of  land  is  at  the  intensive  margin  when 
the  cultivator  finds  that  further  product  sells  for  barely 
enough  to  make  further  production  worth  while.  The 
marginal  land  or  instrument,  or  the  marginal  use,  earns 
no  rent,  precisely  because  there  is  nothing  to  pay  rent  with. 
Better  lands  or  better  instruments,  or  better  grades  of 
either,  command  rent  because  they  are  worth  paying  rent 
for.  Production  stops  at  any  margin  precisely  because, 
at  the  selling  price  of  the  product,  production  cannot  wisely 
be  carried  further.  But,  obviously,  this  is  not  to  say 
that  the  marginal  land,  or  the  marginal  product,  or  the  cost 
of  production  of  the  marginal  product,  determines  the  price. 
All  of  the  supply  over  against  all  of  the  demand  determines 
the  price.  Marginal  instruments,  marginal  products,  and 
marginal  producers  can  affect  the  price  onl}^  as  they  affect 
the  supply  of  products.  Thus  no  one  of  all  the  different 
margins  of  the  entrepreneur,  and  no  total  of  all  the  different 
margins  of  all  the  different  entrepreneurs,  will  be  price-de- 
termining or  even  price-influencing,  excepting  to  the  degree 
that  supply  undergoes  modification  and  to  the  extent 'that 
supply  is  an  influence  in  the  fixation  of  price. 

The  truth  in  pain  cost. — And  it  is  evident,  also,  not  onlj^ 
that  all  outlaw's  are  elements  of  cost,  but  also  that  personal 
preferences,  repugnancies,  considerations  of  climate,  neigh- 
borhood, home  ties,  national  prejudice,  wholesomeness, 
cleanliness,  good  repute,  are  all  elements  in  cost  to  the 
extent  that  they  impose  expense  to  overcome  them  —  to 
the  extent,  that  is,  that  they  restrict  supply  and  so  increase 
the  price  of  the  remaining  supply.  The  cost  problem  with 
reference  to  each  entrepreneur,  and  thereby  to  any  instru- 
ment or  agent  under  his  control,  is  simply  and  solely  to  de- 
termine the  point  at  which  supply  in  different  quantities 
can  be  had  from  him,  and  the  degree  and  the  extent  of  his 
elasticity  in  output  with  changes  in  price.     And  it  is  as  one 


SUPPLY  AND   COST  83 

among  all  the  other  cost  influences,  but  commonly  as  the 
influence  of  paramount  importance,  that  opportunity  cost 
acquires  significance  in  the  price  problem.  In  any  case, 
therefore,  cost  is  purely  a  computation  of  the  individual 
competing  entrepreneur.  Each  entrepreneur  has  his  par- 
ticular cost  computation  for  his  different  items  of  product 
and  for  different  quantities  of  product.  The  cost,  then,  of 
any  item  or  volume  of  product  is  simply  the  money  expres- 
sion of  the  total  of  resistance  to  which  any  entrepreneur  is 
subjected  in  producing  that  item  or  that  volume. 

It  has  now  been  shown  that,  the  demand  for  any  good  being 
taken  for  granted,  cost  of  production  fixes  the  limit  upon  the 
supply  of  that  good  —  if  it  be  a  reproducible  good  —  and 
determines  the  price  of  the  good,  solely  through  modifying 
the  volume  of  the  supply ;  that  the  cost  of  production  of  any 
item  or  volume  of  goods  to  any  i^roducer  is  the  aggregate  in 
terms  of  price  of  all  the  resistances  to  his  production  of  that 
item  or  volume ;  that  alternative  opportunities  for  gain 
through  ministering  to  other  demands  are  ordinarily  of  para- 
mount significance  to  him  in  arriving  at  this  total  of  resist- 
ance ;  that  therefore  cost  of  production,  as  the  limitation 
on  the  supply  of  any  one  good,  resolves  itself  commonly  and 
mainly  into  the  resisting  appeal  of  alternative  and  competing 
demands ;  and  that  the  marginality  of  any  entrepreneur  in 
producing,  or  the  marginality  of  any  of  the  factors  of  pro- 
duction in  his  employ,  can  be  significant  for  price  only  as 
indicating  different  and  particular  directions  of  influence 
upon  the  aggregate  supply  of  products  offered  upon  the 
market. 

Our  next  investigation  will  concern  itself  with  the  relation 
between  the  need  or  desire  felt  by  an  individual  for  a  com- 
modity and  his  disposition  to  pay  money  to  obtain  it,  or  to 
sacrifice  money  to  keep  it  —  the  relation,  that  is  to  say,  be- 
tween utility  and  demand.  It  will  be  made  clear  that  utility 
is  purely  a  relation  to  an  individual,  and  that  the  utility  of  the 
good  to  him  is  merely  one  way,  the  technical  way,  of  express- 
ing the  fact  that  he  wants  it ;  that  no  such  thing  as  social 
utility  is  known  to  the  competitive  market ;  that  the  mere 
fact  of  utility,  the  mere  existence  of  a  good,  does  not  suffice 


84  THE  ECONOMICS  OF  ENTERPRISE 

to  explain  the  disposition  of  an  individual  to  pay  a  price  for 
it ;  it  must  also  be  a  scarce  good  —  a  good  having  what  is 
kno\^^l  as  marginal  utility.  Thus  the  precise  relations  be- 
tween utility  and  marginal  utility  will  come  under  examina- 
tion :  it  will  be  made  clear  not  only  that  the  individual's  offer 
of  money  for  a  good,  his  demand,  is  not  determined  either  by 
the  utility  of  the  good  or  by  its  marginal  utility  —  though 
conditioned  on  the  presence  of  both  —  but  also  that  his  de- 
mand cannot  be  measured  either  by  the  utility  or  by  the  mar- 
ginal utility  of  the  good,  and  cannot  measure  either ;  that  the 
disposition  of  the  individual  to  pay  a  price  for  a  good  is  the 
outcome  of  his  comparison  of  the  marginal  utility  of  the 
good  in  question  with  the  marginal  utility  of  something  else 
to  be  had  for  his  money ;  and  that  a  marginal  price-offer  ex- 
presses the  point  of  indifference  between  alternative  applica- 
tions of  an  individual's  purchasing  power.  It  must,  then,  be 
so  much  the  more  clear  that  market  price,  as  merely  the  equat- 
ing pomt  between  the  total  demand  for  a  particular  good  and 
the  total  supply  of  that  good,  cannot  measure  either  utility 
or  marginal  utility  or  be  measured  by  either. 


CHAPTER  VII 

UTILITY  :    DEMAND  :    DEMAND    WITH    SUPPLY 

Demand  and  supply  related  to  price.  —  Market  price  is 
always  and  everywhere,  and  for  every  niarketed  fact,  the 
point  of  adjustment  between  demand  and  supply.  Nor  is 
there  any  market  price  possible  on  terms  other  than  of  this 
adjustment.  Increase  the  demand  for  any  good,  the  supply 
remaining  the  same,  and  the  price  rises.  Increase  the  supply, 
the  demand  remaining  unchanged,  and  the  price  falls. 
Demand  and  supply  make  something  analogous  to  an  alge- 
braic equation.  Any  change  in  either  side  of  the  equation 
means  a  change  in  the  value  of  x,  a  new  point  of  adjustment 
by  virtue  of  which  the  equilibrium  is  established  in  the  new 
equation. 

Therefore,  always  and  everywhere,  no  change  can  take 
place  in  the  price  of  a  good  otherwise  than  as  a  result  of  a 
change  in  the  demand  for  it  or  in  the  supply  of  it  or  in  both. 
It  is  easily  deduced,  also,  that  no  good  can  ever  command  a 
price  unless  there  is  a  demand  for  it.  Nor,  on  the  other 
hand,  can  any  good  attain  to  a  price  unless  the  supply  of 
it  is  limited  relatively  to  the  need  for  it.  One  pays  for  a 
thing  only  because  he  has  to  pay  —  or  thinks  he  has  — 
in  order  to  get  it.  Our  problem  of  market  price  divides, 
then,  into  two  subordinate  problems  or  aspects,  demand  and 
supply,  each  of  which  requires  its  separate  examination.  Sup- 
ply has  just  been  analyzed  ;  we  now  come  to  the  demand :  but 
as  preliminary  to  demand  and  as  the  foundation  and  explana- 
tion of  it,  we  have  first  to  consider  utility  and  marginal  utility. 

Utility.  —  No  man  would  ever  pay  for  a  thing  unless  he 
wanted  it.  The  fact  that  a  thing  is  wanted,  that  it  responds 
to  a  desire,  is  called  the  utility  of  it.  In  a  certain  sense  it 
may  be  said  that  one  wants  the  thing  because  it  is  useful 

85 


86  THE  ECOXOMICS  OF  ENTERPRISE 

to  him  —  because,  that  is,  it  is  appropriate  to  his  needs. 
Perhaps,  however,  the  truth  is  rather  with  those  who  in- 
sist that  primarily  we  do  not  desire  things  because  they  are 
useful  to  us  or  give  us  pleasure,  but  rather  that  they  are  use- 
ful to  us  or  give  us  pleasure  because  we  desire  them.  Just 
as  the  chicken  pecks  its  way  out  of  its  shell  without  fore- 
knowledge of  the  glories  of  the  outside  day,  and  immedi- 
ately upon  exit  picks  up  a  grain  or  two  of  sand,  nowise  in- 
terested in  the  near-by  gratification  of  its  pungent  flavor  or 
in  the  faraway  joys  of  a  well-sanded  digestion,  just  so  human 
instincts  and  tastes  and  impulses  reach  their  time,  and  spon- 
taneously activities  press  forward  to  expression;  rattles 
wane,  and  dolls  wax,  while  in  later  succession  sleds  and 
canes  and  sweethearts  and  homes  and  offspring  and  offices 
and  professorships  successively  crowd  upon  the  stage  of 
human  activity.  Things  move  from  indifference  through 
gratification  to  satiation,  as  men  change  in  their  equipment 
of  desires  and  tastes  and  sympathies.  And  when  a  thing 
comes  to  give  us  pleasure,  it  does  so  merely  because  we  have 
come  to  like  it. 

Utility  is  desiredness.  —  At  any  rate,  this  view  of  desire 
harmonizes  best  ■v\dth  the  concept  of  economic  utility.  Util- 
ity is  the  mere  fact  that  a  thing  is  desired.  There  is  in  the 
term  no  slightest  implication  of  the  commendable  character 
of  the  desire  or  of  the  good  sense  of  its  satisfaction.  Men 
put  forth  effort  and  undergo  privation  to  get  whisky,  cigars, 
automobiles,  and  burglars'  jimmies,  as  well  as  for  food,  or 
statuary,  or  harvest  machinery.  So  long  as  men  are  in- 
fluenced by  evil  purpose  or  by  ignorance  to  buy  and  sell 
foolishness  and  evil,  just  so  long  these  desires  must  be  recog- 
nized as  economic  facts  and  the  commodities  as  of  market 
standing.  Whether  we  like  it  or  not,  utility  as  an  economic 
concept  means  simply  adaptability  to  human  desire. 

And  therefore,  in  this  sense  to  say  that  a  thing  has  utility, 
or  is  a  good,  is  nothing  more  than  to  say  that  some  one  wants 
it ;  or,  if  it  is  anything  more  than  this,  it  is  so  much  the  worse. 
Utility  is  not  a  quality  of  a  thing  but  is  simply  a  relation  be- 
tween an  objective,  external  fact  and  a  desiring  human  being. 
Whether  or  not  any  qualities  are  anything  more  than  mere 


UTILITY,   DEMAND,   SUPPLY  87 

relationships,  utility,  at  all  events,  is  nothing  more.  As  the 
human  being  changes,  the  utility  changes  —  may  become 
greater  or  may  disappear  entirely.  As  well  say  that  the 
northness  of  a  thing,  relatively  to  any  second  thing,  lies  all 
in  the  first  thing,  as  to  say  that  utility  inheres  in  tlie  objec- 
tive fact.  Whether  anything  is  north  or  south  of  you  de- 
pends on  where  you  are. 

All  qualities  are  relations.  —  This  fundamental  principle  of  the 
relativity  of  all  qualities  has  long  been  clear  enough  to  the  philoso- 
phers —  and  to  some  poets.  What  we  hear  or  what  we  see  or  what 
we  feel  is  no  test  of  what  really  is.  We  are  in  touch  with  the  out- 
side world  only  through  the  intermediary  of  our  senses.  Every- 
thing external  comes  to  us  as  reported  through  our  senses  and  inter- 
preted by  our  perceptions.  What  is  opaque  to  the  light  rays  that 
we  can  see  may  afford  no  obstacle  to  other  rays  to  which  we  are 
blind.  Some  heat  rays  affect  us  also  as  light  rays ;  others  do  not ; 
and  all  might  equally  well  do  both,  or  do  neither,  according  to  our 
apparatus  of  appreciation.  What  lies  in  our  experience  is  no  test 
of  what  is ;  on  the  other  hand,  it  may  be  said  with  equal  truth  that 
experience  is  all  there  is  for  us.  What,  for  example,  does  the  insect 
hear?  So  far  as  we  can  be  certain,  it  may  see  what  we  hear  or  hear 
what  we  see.  The  rose  may  send  its  articulate  call  to  the  humming 
bird,  or  the  lily  to  the  moth.  To  the  vast  regions  of  vibratory 
movement,  from  the  few  thousand  aerial  pulsations  per  second  of  the 
shrillest  tone  up  to  the  millions  per  second  which  we  first  appreciate 
as  light  and  heat,  we  are  entirely  insensible.  In  the  psychological 
sense  Niagara  did  not  roar  before  there  were  ears ;  there  is  no  drum- 
ming if  the  drumsticks  vainly  beat  the  air,  never  impinging  upon 
any  drumhead.  Thus,  for  other  ears  than  ours,  or  for  ears  such  as 
ours  might  be,  the  whole  universe  may  be  travailing  in  shriek  and 
groan  and  varied  uproar:  or  it  may  be  musical  with  chant  and 
choral  and  dulcet  murmurings  —  no  star  of  it  all  but  is  "  quiring  to 
the  young-eyed  cherubins  "  —  no  rose  of  it  anywhere  but  some- 
how, also,  is  a  throat.  It  was,  then,  in  no  sheer  poetic  fantasy,  but 
with  a  basis  of  strict  scientific  possibility,  that  Dryden  declared  the 
beams  of  nature  to  be  laid  every  one  in  music ;  the  spheres  starting 
on  their  courses  in  a  burst  of  melody,  all  beating  time  to  "  the 
cadence  of  the  whirling  world  that  dances  round  the  sun."  ^ 

^George  Eliot,  also,  emphasizing  that  wholesome  dullness  of 
human  wit  that  somehow  finds  comfort  against  the  most  intol- 
erable of  human  ills  in  the  sheer  fact  that  they  are  commonplace 


88  THE  ECONOMICS  OF  ENTERPRISE 

Not  as  literature  or  as  poetic  fantasy  is  all  this  to  our  purpose. 
Later  it  will  have  something  to  say  for  the  meaning  and  the  test  of 
economic  productivitj^ ;  but  it  helps  now  toward  seeing  that  accu- 
rately there  arc  no  attributes  of  things,  in  the  sense  of  something 
intrinsic,  or  objective,  or  in  anj'-  way  inhering  solely  in  the  facts  of 
the  exterior  world.  Utility  —  serviceability,  usefulness  —  exists 
onh'  as  relative  to  a  human  desire,  and  ultimately  means  nothing 
more  than  that  the  thing  is  wanted. 

Marginal  utility.  —  We  have  seen  that  no  one  is  concerned 
to  get  possession  of  any  particular  item  of  commodity  that 
is  so  plenty  as  to  be  had  for  the  taking.  Where  the  supply 
outruns  the  need  we  call  the  commodity  a  free  good  —  air, 
for  example.  This,  however,  does  not  imply  that  it  thereby 
ceases  to  be  a  good  —  that  all  items  of  it  lack  utility  —  but 
only  that  not  all  of  the  items  can  have  utility  at  once.  If 
some  are  to  be  serviceably  used,  this  can  be  only  on  the 
condition  that  some  others  become  surplus  items.  It  would 
not  at  all  matter  that  some  were  lost ;  there  would  be  plenty 
left. 

Many  commodities  which  are  not  markedly  scarce  rela- 

or  universal,  writes  :  "  That  element  of  tragedy  which  lies  in  the 
\ety  fact  of  frequency  has  not  yet  ^vTought  itself  into  the  coarse 
emotion  of  mankind ;  and  perhaps  our  frames  could  hardly  bear 
much  of  it.  If  we  had  a  keen  vision  and  feeling  of  all  ordinary 
human  life,  it  would  be  like  hearing  the  grass  grow  and  the  squirrel's 
heart  beat,  and  we  should  die  of  that  roar  which  lies  on  the  other 
side  of  silence."  — Middlemarch. 

And  the  same  keen-minded  novelist,  who  was  in  turn  philoso- 
pher, poet,  and  scientist,  also  writes  : 

"  Fairj^  folk  a-listening 
Hear  the  seed  sprout  in  the  spring. 
And  for  music  to  their  dance 
Hear  the  hedgerows  wake  from  trance ; 
Sap  that  trembles  into  buds 
Sending  little  rhythmic  floods 
Of  fairy  sound  in  fairy  ears. 
Thus  all  beauty  that  appears 
Has  birth  as  sound  to  finer  sense 
And  Ughter-elad  intelligence." 

—  Daniel  Deronda. 


UTILITY,   DEMAND,   SUPPLY  89 

tively  to  the  need  still  do  not  entirely  cover  the  need ;  there 
is  no  surplus.  There  is,  that  is  to  say,  no  single  item  which 
is  not  capable  of  meeting  a  want,  consistently  with  all  other 
items  finding  their  respective  niches  of  service ;  some  indi- 
vidual is  always  to  be  found  who  would  be  glad  of  more ; 
no  item  of  the  whole  stock  presents  a  zero  utility ;  there  is  a 
marginal  utility  to  the  stock. 

This  principle  is  perhaps  easier  to  grasp  if  we  assume  that  a  given 
individual  has  a  stock  of  say  ten  items  of  any  particular  good  —  say 
bushels  of  wheat,  or  cartridges,  or  dollars.  Suppose,  now,  that  he 
loses  one  of  the  items.  Among  the  various  different  wants  to 
which  any  one  of  these  items  would  equally  well  minister,  which 
want  will  go  unsatisfied?  It  would  evidently  be  the  least  pressing 
among  all  the  wants.  The  importance  then  of  this  least  pressing 
want  expresses  the  significance  of  the  loss  of  any  one  item  out  of  the 
entire  series  or  stock  of  goods.  This  least  significance  or  least 
utility  in  the  stock  is  the  marginal  utilihj  of  that  stock. 

But,  now,  when  nine  items  remain,  the  desire  which  will  be 
thwarted  of  satisfaction  if  one  further  item  is  lost  is  a  stronger  desire. 
Thus,  the  marginal  utility  attaching  to  the  stock  of  nine  items  is 
evidently  greater  than  that  attaching  to  the  stock  of  ten.  So  with 
each  successive  reduction  in  the  total  stock  a  new  and  greater  utiUty 
comes  to  stand  as  the  marginal  utility.  The  utility  of  one  item, 
when  it  is  the  sole  item  possessed,  may  possibly  be  great  beyond 
measure  —  the  issue  of  life  or  death  depending  upon  its  possession. 

Approaching  the  principle  from  the  other  direction,  the  same 
doctrine  would  look  something  as  follows :  As  each  successive  item 
is  added  to  the  supply  of  any  particular  thing  at  any  particular 
time,  one's  wants  become  less  intense.  Thirst  is  less  insistent  after 
the  first  glass  of  water,  hunger  ordinarily  less  keen  with  each  succes- 
sive sandwich  or  order  of  meat  or  of  pie.  That  is  to  say,  each 
separate  desire  is  satiable.  It  is  unnecessary  for  the  present  to  in- 
quire whether  the  same  statement  holds  for  the  aggregate  of  one's 
desires,  or  whether  rather,  as  old  desires  are  relaxing  in  intensity, 
new  desires  are  not  in  turn  constantly  emerging.  Our  present  prob- 
lem, the  adjustment  of  market  price,  has  to  do  with  only  one 
commodity  at  a  time,  and,  therefore,  onlj'^  with  the  way  in  which 
wants  affect  the  price  of  that  one  commodity.  As  leading  up  to  the 
disposition  to  pay  a  price,  though  not  directly  determining  this 
disposition,  utility  and  its  derivative,  marginal  utility,  become  im- 
portant. 


90  THE  ECONOMICS  OF  ENTERPRISE 

This  principle,  then,  of  the  satiability  of  all  desires  —  the  faUing 
utility  of  successive  increments  in  the  stock  of  goods  of  any  one 
intlividual  —  leads  again  to  the  recognition  of  what  is  known  as 
marginal  (or  final)  utility.  Successive  increments  of  supply  call 
fortli  a  continually  diminishing  response  of  desire.  Marginal 
utility  is  the  least  utility  attaching  to  —  or  depending  upon  —  the 
possession  of  any  one  item  of  conmiodity  out  of  the  individual's 
actual  stock.  If  his  stock  consist  of  only  one  item,  this  also  is  a 
marginal  item  in  our  sense  of  the  term. 

Tliis  is  very  simple  to  grasp  for  cases  where  one  is  either  sub- 
tracting item  after  item  from  his  stock  or  adding  item  after  item 
to  his  stock.  He  grows  more  keen  in  interest  with  each  loss,  less 
keen  with  each  additional  item.  But  consider  once  again  the  prob- 
lem, if  the  case  be  not  conceived  as  one  of  a  succession  of  com- 
moditj'^  items,  —  if  no  item,  that  is,  be  regarded  as  coming  early  or 
late  as  compared  with  any  other,  but  as  portions  of  a  stock  already 
on  hand :  which  now  is  the  marginal  item  —  the  item  of  least 
promise  of  service  ?  All  have  equal  possibilities ;  it  is,  therefore,  no 
longer  possible  to  regard  any  one  item  as  entitled,  as  against  any 
other,  to  the  marginal  place.  But,  even  so,  it  is  possible,  as  we  have 
seen,  to  regard  any  item  as  marginal,  in  the  sense  that  the  loss  of  it 
would  be  felt  as  involving  only  the  degree  of  utihty  depending  upon 
the  possession  of  it,  and  as  significant,  therefore,  only  according  to 
the  strength  of  the  desire  frustrate  b}'  the  loss  of  it.  This  utility 
would  be  the  equivalent  of  the  utility  of  the  last  item  in  the  series 
were  the  different  items  acquired  or  considered  successively. 

And  note  again  that  it  by  no  means  follows  that  all  of  the  items  are 
marginal  because  any  one  of  them  may  be  so.  Not  all  items  of  a 
stock  can  be  marginal  at  once.  No  one  item  can  be  regarded  as 
marginal  excepting  on  such  terms  of  regrouping  as  shall  impose  the 
non-marginal  position  upon  all  the  others.  But  it  is,  of  course, 
possible  to  treat  the  entire  series  as  an  indi\asible  group  —  as  a 
unit  —  and  therefore  to  estimate  the  aggregate  marginal  utility  of 
the  group  taken  as  a  unit.  The  loss  of  utility  that  will  be  suffered 
in  the  loss  of  the  entire  stock  is  clearly  not  the  marginal  utility  times 
the  number  of  items.  The  sum  of  the  utilities  of  each  of  the  items 
regarded  separately  is  the  utility  of  a  stock  considered  as  a  mar- 
ginal group,  or  unit.  It  is  a  case  of  addition  and  not  of  multi- 
pUcation. 

Nor  is  the  marginal  item  to  be  taken  to  indicate  necessarily  the 
item  on  the  margin  of  disappearing  utility  —  an  item  barely  worth 
having,  an  item  just  on  the  hither  side  of  satiation.     There  are, 


UTILITY,   DEMAND,   SUPPLY  91 

it  is  true,  marginal  cases  of  this  sort,  and  other  marginal  cases 
approaching  closely  to  it ;  but  any  one  of  these  is  only  one  case  out 
of  countless  different  cases  of  marginality.  The  point  of  satiation 
is  only  one  of  the  cases  of  marginal  utility,  not  at  all  the  only  one. 
The  least  utihty  of  whatever  stock  the  individual  has  is  the  mar- 
ginal utihty  for  that  stock. 

Marginal  utility  and  scarcity.  —  In  the  foregoing  chapter 
were  traced  the  causes  which  fix  or  limit  supply  in  the  price 
equation.  A  further  step  may  now  be  taken  :  The  existence 
of  marginal  utility  to  the  individual  —  and  likewise  the 
size  of  the  marginal  utility  at  any  particular  time  —  depends 
upon  the  volume  of  his  supply.  Only  on  terms  of  some  limit 
upon  the  supply  can  the  marginal  item  afford  utility.  With 
the  supply  outrunning  the  need,  some  items  of  the  supply 
must  be  useless,  or,  as  it  might  possibly  be  phrased,  have 
a  marginal  utility  of  zero.  And  further  :  It  is  only  as  condi- 
tioned upon  the  existence  of  marginal  utility  that  any  good 
can  command  a  price.  Where  the  marginal  utility  is  zero, 
no  one  will  pay  anything  for  any  single  item  of  the  supply, 
since  no  one  would  have  to  pay  in  order  to  have  the  item. 
Air,  for  example,  is  of  the  highest  possible  utility  —  some  of 
it  —  but  commands  no  price  because,  commonly,  there  is 
air  in  more  than  plenty.  So,  often  or  usually,  with  water. 
On  the  other  hand,  scarcity  alone  gives  no  basis  for  price; 
else  mosquitoes  would  be  valuable  in  winter.  Both  utility 
and  scarcity  are  thus  fundamental  conditions  to  the  emergence 
of  price,  —  utility  on  the  demand  side  as  the  basis  of  the 
disposition  to  pay  if  necessary  —  scarcity  on  the  supply  side 
as  the  necessity  for  making  the  payment. 

Marginal  utility  and  price-oflfer.  —  It  does  not  follow,  however, 
that  always  when  utility  is  recognized,  the  want  felt,  payment  will  be 
made.  For  note  carefully  that  desire  and  demand  are  not  inter- 
changeable terms.  The  boy  with  his  nose  glued  to  the  window  of  the 
candy  store  represents  desire  enough  for  candy,  but  no  demand, 
else  he  would  be  on  the  inside  of  the  shop.  Economic  demand  has 
desire  for  its  condition,  but  it  is  more  than  desire ;  it  is  desire  coupled 
with  purchasing  power.  The  want  alone  signifies  nothing  in  the 
market.  That  things  are  wanted  —  have  utility  —  is  merely  a 
necessary  condition  to  economic  demand. 


92  THE  ECONOMICS  OF  ENTERPRISE 

Marginal  utility  and  price-offer  incommensurable.  — 
But  great  care  must  be  taken  to  avoid  the  widespread  and 
pernicious  error  of  identifying  marginal  utility  with  marginal 
price-offer.  Do  we  really  know  how  much  one  needs  a  thing 
by  knowing  what  he  will  pay  for  it  —  that  the  poor  man 
wants  his  $1500  house  no  more  than  the  rich  man  his 
Si 500  automobile?  Yet  over  and  over  again  it  is  asserted 
—  by  economists  who  ought  to  know  better  —  that  the 
marginal  utility  to  the  bidder  determines  his  bid ;  or  that 
his  bid  expresses  his  marginal  utility ;  or  that  the  marginal 
bid  expresses  the  marginal  utility  of  the  commodity  to 
buyers  in  general ;  or  that  the  market  price  expresses  the 
marginal  utility;  or  that  the  marginal  utility  determines, 
or  is  commensurate  with,  the  market  price.  In  truth,  no 
one  of  all  these  formulations  is  defensible.  Each  is  the  result 
of  slipshod  thinking  —  not  better  than  a  blunder,  but  never- 
theless a  blunder  of  a  very  specious  and  dangerous  sort. 
Yet  the  mistake  is  not  difficult  to  detect.  In  the  hat  illus- 
tration the  price  was  fixed,  say,  at  So,  $5  being  the  maximum 
bid  of  the  marginal  buyer,  say  your  own  bid.  Why  should 
your  bid  be  $5  while  that  of  another  man  w'as  6,  and  that  of 
still  another  only  4  or  3  or  1  ?  Surely  the  marginal  utility 
of  the  hat  to  each  bidder  must  have  something  to  do  with  his 
bid ;  no  one  would  bid  at  all  if  there  were  no  marginal  utility 
for  him  in  the  hat.  But  why  was  your  maximum  bid  at 
S5?  Doubtless,  other  things  being  equal,  the  greater  the 
marginal  utility,  the  higher  the  bid,  and  the  smaller  the 
marginal  utilit}^  the  lower  the  bid.  You  draw  the  line  at 
•85  because  —  as  you  might  put  it  —  you  can't  afford  any 
more  for  the  hat,  or  because  it  isn't  worth  any  more  than 
85  for  you.  Yes,  —  but  why?  Plainly  because  with  the 
hat  costing  more  than  85,  you  would  rather  buy  something 
else,  now  or  later,  with  your  money.  If  you  were  very  rich, 
3^ou  would  feel  otherwise  about  the  85  outlay,  because  then 
to  buy  the  hat  with  the  85  would  displace  a  much  less  urgent 
alternative  need.  So  one  may  be  willing  to  give  to-day  for 
bread  double  what  he  would  have  given  a  year  ago,  although 
only  equally  as  hungry  to-day.  The  poor  man  goes  without 
what  the  rich  man  purchases,  not  because  of  a  smaller  need 


UTILITY,   DEMAND,   SUPPLY  93 

for  the  thing  under  consideration,  but  because  of  a  greater 
need  for  something  else.  The  strength  of  the  desire  for 
other  things  is  a  necessary  factor  in  his  decision.  Buyers 
are  marginal,  therefore,  not  by  virtue  of  the  absolute  mar- 
ginal utility  but  only  of  the  relative  marginal  utility.  A 
wealth  of  illustrations,  edifying  to  the  point  of  weariness  — 
about  the  cigar  and  the  loaf  of  bread,  Dives  and  Lazarus, 
the  starving  man  and  the  man  at  the  feast  —  ought  long 
since  to  have  placed  this  truth  beyond  the  range  of  discussion 
or  the  danger  of  misconception.  The  fact  is  that  one  decides 
to  pay  or  not  to  pay  a  particular  price  for  a  good,  not  as  a 
question  solely  of  his  degree  of  need  of  it,  but  also  of  the 
necessity  which  the  purchase  of  it  imposes  upon  him  of 
going  without  some  other  marginal  utility.  No  one  is  will- 
ing to  trade  by  the  mere  fact  that  he  has  become  conscious 
of  the  importance  to  him  of  some  particular  article.  He 
must  have  become  similarly  conscious  with  regard  to  that 
definite  or  indefinite  something  which,  buying  the  first,  he 
must  forego.  Marginal  utility  is  a  necessary  step  in  the 
case,  but  it  does  not  suffice;  not  one,  but  two  marginal 
utilities  are  necessary  for  the  fixing  of  a  price  offer.  Mar- 
ginality,  that  is  to  say,  is  an  equality  of  ratio  between  com- 
peting marginal  utilities :  the  thing  in  prospect  is  to  the 
thing  foregone  as  1  is  to  1  or  as  5  is  to  5,  etc.  And  this  equal- 
ity of  ratio  between  the  thing  purchased  and  the  thing  fore- 
gone is  the  only  characteristic  which  different  marginal 
buyers  have  in  common.  They  are  willing  to  pay  the  same 
market  price,  and  this  by  virtue  of  the  same  equality  of 
ratio.  Neither  money  in  general  nor  any  particular  amount 
of  money  is  adequate  to  measure  or  express  utility.  Mar- 
ginal utility  is  one  thing,  a  real  thing,  but  a  thing  carefully 
to  be  distinguished  from  that  other  real  and  important  thing, 
marginal  price  offer. 

This  process  of  comparing  marginal  utilities  —  this  estimation  of 
the  significance  of  one  thing  in  terms  of  another  —  is  sometimes 
called  subjective  valuation,  and  the  result  called  a  subjective  value  — 
as  over  against  the  objective  ratios  between  things  established  in 
the  market  and  called  market  values. 


94  THE  ECONOMICS  OF  ENTERPRISE 

Margins  are  never  determinants.  —  But  this  vagueness  of 
thttuglit  is  si  ill  more  si'rious  when  it  is  said,  as  it  often  is, 
that  the  marginal  oi'fer  fixes  the  price.  If,  indeed,  the  offer 
is  precisely  on  the  margin,  a  case  of  complete  indifference 
between  the  purchase  and  the  non-purchase,  the  maximum 
marginal  offer  is  truly  commensurate  with  the  market  price. 
But  this  is  worlds  away  from  the  assertion  that  the  marginal 
traders  —  the  buyer  alone,  or  buyer  and  seller  together  — 
are  the  determinants  of  the  price.  All  the  different  buyers 
and  all  the  different  sellers  contribute  to  determine  the 
price.  "  The  withdrawal  of  iron  from  any  one  of  its 
necessary  uses  would  have  just  the  same  influence  on  its 
value  as  the  withdrawal  from  its  marginal  use."  ^  The 
marginal  item,  whether  of  demand  or  supply,  differs  from 
any  other  item  only  that  through  it,  as  marginal  increment, 
a  determination  may  schematically  be  made  of  just  what 
effect  it,  or  any  other  single  item,  has  had  upon  the  price 
adjustment,  measurement  being  made  from  the  point  at 
which  all  the  other  forces  in  the  market  would  otherwise 
have  left  the  price.  Not  to  the  soldier  who  fires  the  last 
gun  is  the  victory  to  be  accounted,  nor  is  the  smallest  boy 
who  touches  off  a  firecracker  to  be  held  responsible  for  the 
Fourth-of-July  hubbub.  If  there  is  truly  a  marginal  buyer, 
the  marginal  price  must  coincide  with  his  demand  price ; 
but  neither  the  point  of  adjustment,  nor  the  buyer  at  this 
point,  is  the  determinant  of  price.  This  buyer  is  the  least 
forceful  among  all  the  buyers.  True  it  is  that,  if  he  were 
not  in  the  case,  the  price  would  have  been  other ;  but  so  is 
this  true  of  each  of  the  other  buyers.  The  marginal  demand 
is  one  among  the  whole  number  of  demands,  and  as  such  has 
its  part  in  the  resulting  adjustment ;  but  it  is  the  entire 
demand  in  equilibrium  with  the  entire  supply  that  gives 
this  market  adjustment.  Almost  as  well  speak  of  the  child 
who  chases  the  wave  up  and  down  the  shingle  as  fixing  the 
wave-front,  as  to  speak  of  any  margin  as  determining  the 
price. 

All  talk,  then,  of  the  fixation  of  price  by  either  or  both  of 

'  Marshall,  Principles  of  Economics,  Fourth  Ed.,  p.  580,  n. 


UTILITY,   DEMAND,   SUPPLY  95 

the  margins  is  nonsense.  It  would  be  nearer  the  truth,  in- 
deed, to  say  that  each  purchaser  sells  as  the  result  of  the  price 
and  that  each  different  buyer  accepts  the  price  offer  which 
the  market  holds  out  to  him.  At  the  most,  the  market 
price  is  simply  commensurate  with  the  marginal  offer  or 
with  the  marginal  selling  price.  It  is  not  the  result  of  either 
more  than  of  the  other  ;  demand  has  no  more  to  do  with  price 
than  has  supply.  Nor  is  the  price  rightly  to  be  regarded 
as  the  result  of  both  margins  together.  It  is  the  result  of 
all  the  price  offers  over  against  all  the  commodities  offered. 
Price  is  adjusted  at  the  margin  and  not  by  the  margin  — 
where,  indeed,  either  manner  of  statement  accurately  holds. 
To  assert  that  these  marginal  traders  are,  as  against  the 
opposing  in-pressing  volumes  of  commodities  and  of  pur- 
chasing power,  the  causal  facts  in  fixing  the  price  calls  to 
mind  ^sop's  tale  of  how  the  fly  sat  on  the  axle  tree  of  the 
chariot  and  said,  "  What  a  dust  do  I  raise !  " 

Margins  participate  in  causation.  —  It  is,  however,  not  a 
full  and  adequate  expression  of  the  truth  to  say  that  the 
marginal  trades  are  merely  the  results  of  the  price.  In  the 
main,  of  course,  whether  any  man  is  marginal  in  producing 
or  selling  depends  on  the  conditions  which  he  faces.  Mar- 
ginal buying,  also,  is  rather  the  effect  of  the  price  than  the 
cause  of  it ;  the  total  situation  is  directive  of  each  individual 
in  it.  None  the  less,  however,  must  each  be  recognized  as 
contributing  to  the  making  of  the  total  situation.  The 
buyer  buys  because  the  price  attracts  him,  but,  as  one  among 
the  demands,  helps  to  determine  or  modify  the  price.  The 
producer  accepts  the  offer  which  the  market  price  holds  out 
to  him,  but,  in  turn,  in  placing  goods  upon  the  market, 
modifies  the  price.  It  is,  indeed,  precisely  through  this  in- 
fluence of  changing  supplies  of  product  to  modify  an  existing 
price  that  cost  of  production  has  to  do  with  price  at  all. 
The  logical  difficulty  in  keeping  cause  and  effect  apart  is 
not  rare  in  the  study  of  actual  phenomena.  There  are 
mutual  reactions ;  that  which  was  effect  becomes  in  turn  a 
cause.  If,  then,  there  is  perplexity  in  thinking  of  any  par- 
ticular fact  as  at  the  same  time  both  cause  and  effect,  let 
one  imagine  himself  as  jumping  —  the  last  person  —  upon 


96  THE  ECONOMICS  OF  ENTERPRISE 

a  crowded  raft  ami  thinking  with  it ;   docs  he  sink  the  others 
or  do  they  sink  him  ? 

The  higgling  area.  —  Occasionally,  however,  cases  occur  in 
which  even  the  marginal  buyer  is  disposed,  if  necessary,  to 
pay  a  price  apprecial)ly  liigher  than  the  minimum  at  which 
the  seller  could  be  induced  to  sell  —  precisely  as  in  the  iso- 
lated horse  trade,  one  man  might  be  willing  to  pay  as  high 
as  one  hundred  dollars  for  a  horse  which  the  owner  would 
sell  at  fifty  dollars  if  he  could  not  get  more.  With  a  larger 
number  of  seekers  and  of  sellers,  this  intra-marginal  interval 
is  likely  to  be  much  narrower ;  but  even  so,  the  lowest-price 
buyer  may  be  willing  to  pay  something  more  than  the  high- 
est-price seller  must  receive.  These  intra-marginal  areas 
for  higgling  —  these  opportunities  for  ruse  and  guile  and 
strategy,  and  even  for  occasional  feats  of  lying  —  are  not 
rare.  It  is  sometimes  asserted  that  within  this  area,  where  it 
exists,  the  marginal  traders  do  actually  fix  the  price,  in  the 
sense  merely  that,  by  doing  the  higgling,  they  give  the  last 
touches  to  the  adjustment ;  make  it  precise  ;  finish  it ;  put, 
so  to  speak,  a  fine  edge  upon  it.  But  not  even  so  much  as 
this  can  be  true  for  the  vast  majority  of  cases.  With  an 
indefinite  number  of  sellers  and  buyers  in  the  market,  it  can 
hardly  be  true  that  in  order  to  reach  a  price  adjustment  any 
particular  pair  of  individuals  must  get  together.  They 
certainly  need  not ;  all  that  the  perfect  market  assumes  is 
that  such  a  price  be  reached  as  shall  leave  no  one,  having  the 
willingness  to  sell  below  the  price,  to  cry  his  wares  without 
a  purchaser,  and  as  shall  leave  unsupplied  no  purchaser  who 
would  yet  search  for  the  commodity  at  any  slightest  fraction 
above  the  price  established.  The  price  which  will  fulfill 
these  conditions  may  be  established  in  no  matter  what 
way;  it  is  sufficient  that  it  will  not  be  disturbed.  The 
chances  are  evidently  thousands  to  one  that  the  marginal 
traders  will  not  get  together  to  higgle,  and  it  is  by  no  means 
clear  that  these  are  the  traders  of  especially  marked  dis- 
position to  higgle.  That  they  are  the  most  indifferent  of 
all,  in  point  of  the  volume  of  differential  advantages  {con- 
sumers' surpluses)  at  stake,  may  not  indeed  fairly  argue  that 
they  are  the  least  interested  in  the  particular  penny  or  two 


UTILITY,   DEMAND,   SUPPLY  97 

to  be  contended  for ;  but  in  actual  fact  not  the  number  of 
pennies  at  stake,  but  the  kind  of  people  playing  for  these 
pennies,  will  mostly  determine  who  will  do  the  higgling  and 
liow  much  higgling  will  be  done.  Women  of  the  shopping 
and  bargain-counter  mania  deserve  especial  attention  in 
this  connection.  There  is  no  sufficient  reason  for  supposing 
them  to  be  purchasers  at  or  near  the  margin  of  indifference. 

All  utility  is  relative  to  the  individual.  —  The  foregoing  discussion 
should,  by  implication,  have  made  it  clear  that  utility  and  mar- 
ginal utility  and  relative  marginal  utility  have  to  do  solely  with  the 
particular  individual  as  an  account  of  the  way  in  which  he  arrives 
at  his  purely  personal  and  individual  decision  to  become  a  purchaser 
at  not  more  than  a  particular  price  —  to  enter  his  own  demand  as 
one  among  the  great  total  of  demands.  Strictly  speaking,  there  is  no 
such  thing  as  the  comparison  of  the  utility  to  one  person  with  the 
utility  to  another.  Men  differ  in  desires  and  in  the  degree  and  man- 
ner in  which  things  appeal  or  appear  to  offer  ser\ace.  Only  so 
far  as,  in  the  general  likeness  of  one  man  to  another,  human  beings 
approach  to  a  perfect  similaritj'',  or  only  so  far  as  for  some  purposes 
the  individual  differences  maj^  safely  be  overlooked,  is  there  room 
for  talk  of  group  aggregates  of  utility,  or  is  there  purpose  or  safety 
in  the  notion  of  social  utility  or  of  social  sacrifice  or  of  social  pain. 
But  for  the  problems  of  market  price  these  individual  differences 
will  not  down.  Men  are  unlike  not  only  in  tastes,  in  intensity  and 
vividness  of  feeling  and  of  desire,  and  in  the  relative  strength  of 
needs  and  desires,  but  even  more  in  the  pecuniary  ability  to  com- 
mand the  appropriate  satisfactions.  Any  homogeneity  of  utility, 
any  attempt,  for  the  purposes  of  the  price  problem,  to  force  different 
men  into  any  other  common  denominator  than  this  very  obvious 
one  of  price-offer  itself,  is  possible  only  at  the  sacrifice  of  all  clear 
thinking.  It  is,  indeed,  worse  than  this  ;  for  it  removes  any  prob- 
lem to  think  about.  As  Pudd'nhead  Wilson  observed  :  "It  were 
not  best  that  we  should  all  think  alike ;  it  is  difference  of  opinion 
that  makes  horse  races."  And  so  of  speculation  :  and  so,  in  fact, 
of  all  trading.  Abstracting  from  the  differences  between  men  in 
order  to  explain  trade,  all  trade  becomes  impossible. 

Is  demand  price  sufficient  ?  —  It  is,  however,  sometimes  urged 
that  no  other  fact  or  assumption  is  necessary  in  the  discussion  of 
demand  than  this  one  of  willingness  to  pay  in  terms  of  money; 
that  if  the  reduction  of  all  money  demand  into  a  utihty  jelly  is 


98  THE  ECONOMICS  OF  ENTERPRISE 

nonsense,  the  more  distinctl.y  individualistic  method  is  at  best 
merely  "useless  fatigation  "'  —  and  is  really  even  worse.  Why 
not  stop  with  the  fact  that  the  tlifferent  men  have  different  price 
paying  ilispositions  and  let  it  go  at  that?  The  further  analysis  is 
admittedly  merely  an  attempt  to  furnish  an  underpinning  to  the 
phouonu>na  of  price  ofTers.  Instead  of  disturbing  or  changing  the 
results  of  the  earlier  economists,  this  new  marginal  utilitj'  school  of 
thought  does  nothing  more  —  it  is  said  —  than  to  supplement  and 
to  complete :  is  it  worth  the  bother? 

Impulsive  or  unreflective  activity.  —  But  these  objectors  shortly 
unmask  a  more  serious  attack:  they  assert  that  the  marginal 
utility  analysis  rationalizes  human  activity  out  of  all  semblance  to 
reality.  Even  with  utihty  shorn  of  any  implication  that  human 
desires  concern  themselves  exclusively  with  pleasure  and  pain,  and 
implying  nothing  but  the  mere  fact  of  want,  this  analysis,  it  is  said, 
overlooks  the  fact  that  man  in  most  of  his  activities  is  neither  re- 
flective nor  deliberative ;  he  does  not  weigh  and  balance  in  the  man- 
ner imputed  to  him  ;  he  just  acts ;  he  is  not  a  calculating  machine. 
More  often  —  not  always,  to  be  sure  —  he  acts  from  impulse  and 
habit  and  irreflection.  Instinct  and  habit  and  spontaneity  manifest 
themselves  in  the  economic  world  as  truly  as  in  the  world  of  play 
or  of  romance.  As  between  automaton  and  calculating  machine, 
man  is  nearer  the  automaton.  The  difficulty  vdth  the  marginal 
analysis  is,  in  short,  —  these  objectors  insist,  —  that  it  has  carried 
the  logic  of  the  case  overfar  —  a  logic  that  is  sometimes  there,  and 
might  always  be  there,  but  more  commonly  is  not  there  —  and  has 
made  this  logic  explain  where  it  really  does  not  apply.  It  has  com- 
pletely rationalized  —  it  is  urged  —  that  which  rarely  more  than 
remotely  approximates  the  rational,  and  commonly  does  not  even 
do  that.  It  has  translated  the  logic  implicit  in  the  marginal  pro- 
cess into  a  conscious  and  complete  and  actual  mental  process.  As 
the  chicken  pecks  its  way  out  of  the  shell  instinctively,  irreflectively, 
uncalculatingly,  and  purposelessly ;  as  one  wakens  in  the  morning 
according  to  the  inner  time  clock  set  at  bedtime ;  as  the  hypnotic 
patient  carries  out  days  later  the  mandate  given  during  his  for- 
gotten trance  experience ;  as  the  idee  fixe  of  pathological  mental 
conditions,  or  even  of  habit,  guards  one  against  all  influence  of  argu- 
ment or  of  appeal ;  as  the  resolve  of  yesterday  remains  by  that  mere 
fact  the  cherished  goal  of  to-day :  so  do  all  of  us  in  a  wide  domain 
of  our  activities,  move  —  it  is  argued  —  in  a  half  blind  trance  of 
inherited  impulses  and  instincts,  and  of  acquired  tendencies  and 
aims.  So  much  of  our  action  is  essentially  reflex  that  there  is  more 
question  whether  any  of  it  is  altogether  calculated  and  purposeful 


UTILITY,   DEMAND,   SUPPLY  99 

than  whether  all  of  it  is.  Habit  and  custom  and  instinct  and  im- 
pulse, it  is  said,  rather  than  rational  processes  of  estimate  and  of 
comparison,  are  the  adequate  explanations  —  if  explanations  there 
are  of  any  sort  —  for  the  conduct  of  human  beings  on  the  market  as 
well  as  off  the  market.  Granted  even  that  in  some  cases  the  cal- 
culation process  explains,  this  makes  it  a  valid  explanation  only  for 
these  cases.  In  short,  the  psychology  of  political  economy  is  hope- 
lessly wrong  —  so  these  skeptics  insist  —  so  far  as  it  rests  upon  the 
marginal  utility  dogma. 

On  the  face  of  the  argument  this  attack  is  certainly  disconcerting. 
And  it  is  no  defense  to  point  out  that  these  critics  purpose  nothing 
better  in  the  place  of  that  which  they  attack  —  that,  giving  them 
their  way,  the  situation  reverts  to  its  ancient  classic  case,  where 
price  offer  was  taken  either  as  an  obvious  and  simple  and  self- 
explanatory  fact  or,  —  as  these  later  folk  would  have  it,  —  as  a 
tiling  inscrutable  in  its  ultimate  mystery  and  as  a  definitive  datum 
in  the  science.  It  must  be  admitted  that  an  obviously  bad  explana- 
tion is  not  made  good  by  the  fact  that  nothing  better  is  offered.  To 
clear  away  old  errors  is  often  a  necessary  step  in  getting  a  problem 
rightly  stated ;  and  to  discover  that  there  is  yet  an  unsolved  prob- 
lem, and  to  state  this  problem,  is  itself  a  step  in  advance. 

Hedonistic  implications  gratuitous.  —  But  first  it  is  to  be  said 
that  in  the  notion  of  utihty  there  is  no  necessary  implication  of  any 
hedonistic  theory  of  desire.  Doubtless  the  word  has  hedonistic 
connotations  —  the  more  the  pity  —  and  might  perhaps  be  better 
replaced  by  some  other  term,  or  even  be  abandoned  out  of  hand. 
The  utility  of  an  object  need  mean  nothing  more,  and  should  be 
taken  to  mean  nothing  more,  than  one  way  of  expressing  the  simple 
fact  that  the  object  is  desired.  Whether  a  desire  or  want  traces 
back  to  instinct  or  to  impulse  or  to  experience,  is  an  inquiry  not  as 
to  the  existence  of  the  want  but  as  to  the  genesis  of  the  want.  This 
is  not  especially  the  economist's  task,  nor  is  he  especially  equipped 
for  its  performance,  nor  is  the  promise  of  success  especially  alluring 
for  him  —  or  for  any  one  else.  It  is  enough  for  the  economist  that 
the  desire  exists,  that  the  external  thing  attracts :  thereby  it  is  a 
good  in  the  mere  sense  that  it  is  desired  ;  one  wants  it.  Thus  there 
is  no  force  in  the  assertion  that  instinct  and  impulse  and  spontaneity 
he,  in  greater  or  less  degree,  back  of  desire.  They  certainly  do ; 
but  there  is  still  the  desire ;  and  only  in  this  sense  is  there  utility. 
And  utility  in  this  sense  there  clearly  is.  If  the  present  wish  to  pur- 
chase is  merely  the  expression  of  the  habit,  it  is,  nevertheless,  a  pres- 
ent wish.    Doubtless  one  might  —  were  the  history  of  the  case  a 


100  THE  ECONOMICS  OF  ENTERPRISE 

pressing  inquiry  —  ask  how  and  why  one  got  into  the  habit :  why 
has  it  so  long  been  the  custom  to  wish?  We  stop  merely  with  the 
wish  —  henee  the  utility. 

Calculation  and  action.  —  Not  so  easily  disposed  of  is  the  other 
aspect  of  the  attack.  Granted  the  desires,  —  that  is  to  say,  the 
different  utilities,  —  is  it  true  that  a  man,  having  (istimated  each  of 
two  of  these  separately,  now  proceeds  to  a  conscious  and  rational 
comparison  of  these  two  as  a  necessary  step  in  arriving  at  some 
definite  limit  upon  his  price  offer,  or  in  deciding  whether  to  buy  or 
not  to  buy  at  a  particular  price?  Do  men  really  have  their  respec- 
tive maxima  in  bidding?  Or  is  this  also  to  impute  to  them  a  some- 
thing that  they  might  have,  and  perhaps  rationally  ought  to  have, 
and  may  occasionally  have,  but  conmionly  do  not  have  ?  When,  for 
example,  one  goes  to  town  to  get  him  a  hat,  does  he  know  how 
high,  if  necessary,  he  will  go  in  price?  Or,  when  he  gets  there,  does 
he  then  find  out?  Or  even  after  he  has  bought  the  hat,  could  he 
tell? 

Excepting  in  marginal  cases,  or  in  cases  close  to  the  margin,  this 
assumed  definiteness  is  surely  not  present :  but  it  is  still  true  that  men 
do  choose.  The  real  issue  is  as  to  how  far  this  is  the  result  of  a 
calculated  and  considered  comparison  of  the  advantages  of  buying  or 
of  the  strength  of  the  desire  to  buy,  as  over  against  the  advantages 
of  buying  now  or  later  something  else,  or  of  the  strength  of  the  desire 
to  buy  something  else.  For  the  vast  majority  of  cases  is  not  this 
marginal  analysis  an  over-rationalization,  or  even  a  rationalized 
caricature,  of  what  actually  takes  place  ? 

Probably  so  —  if  the  marginal  analysis  really  implies  all  this  that 
is  imputed  to  it.  But  it  still  stands  true  that  men  have  desires,  — 
many  desires  for  many  different  things,  —  and  that  these  desires 
conflict  witht  one  another  and  defeat  one  another  of  satisfaction. 
The  individual  has  a  limited  purchasing  power,  and  the  buying  of 
one  thing,  therefore,  means  going  without  some  other  thing.  And 
clearly  enough  the  buyer  knows  this ;  yet  somehow  he  gets  to  a 
choice  of  what  he  shall  buy.  He  has  to  decide ;  and  his  decision,  as 
he  knows,  is  really  the  fulfilling  of  one  desire  on  terms  of  thwarting 
another.  Most  men,  it  is  true,  do  not  know  how  high  they  will  pay, 
but  only  that  they  will  pay  more  than  any  probable  market  require- 
ment will  impose.  Their  choice  is  so  easy  between  buying  and  not 
buying,  between  having  this  or  having  something  else  in  its  place, 
that  the  decision  is  reached  with  so  little  of  consideration  that  it 
hardly  seems  a  choice  at  all.  But  the  choice  is,  nevertheless,  actual, 
despite  the  fact  that  it  is  easy  and  simple  and  that  no  maximum  bid 
needs  be  precisely  fixed.    The  utility  analysis  is  nothing  more  than 


UTILITY,   DEMAND,   SUPPLY  101 

a  schematic  and  very  abstract  account  of  this  process  of  making 
these  choices.  In  the  marginal  case  there  is  more  of  doubt  and 
hesitation,  more  occasion  for  comparing  and  balancing.  That  the 
marginal  case  may  itself  be  one  in  which  habit  or  instinct  or  impulse, 
on  one  or  on  both  sides  of  the  alternative  presented,  determines  the 
actual  decision  is  not  an  objection.  There  is  still  the  alternative; 
and,  if  the  case  is  really  marginal,  it  is  a  case  in  which  the  choice  is 
so  close  as  to  demand  conscious  decision.  Most  men,  for  example, 
have  no  difficulty  in  deciding  which  particular  woman  to  seek  in 
marriage ;  the  rest  are  not  seriously  in  the  running.  But  the  choice 
is  there.  Another  man,  as  with  Eugene  Field  in  his  doubt  as  be- 
tween the  charming  mother  and  her  no  less  charming  daughter, 
may  long  "  Like  an  ass  between  two  stacks  .  .  .  simply  stand 
and  dodder."  This  man  is  marginal.  His  conflicting  desires  are 
near  to  an  equality  of  appeal.^ 

The  adequacy  of  generalizations.  —  But  after  all  it  is  no  necessary 
and  imperative  part  of  the  case  for  the  defense  to  assert  that  this 
principle  of  marginal  choice  takes  account  of  every  possible  influence 
in  all  the  complexity  of  human  impulses,  motives,  and  activity.  It 
is  rare,  indeed,  that  any  scientific  generalization  attains  to  this 
supreme  degree  of  accuracy  and  exhaustiveness ;  possibly  the  pres- 
ent generalization  does  not.  Many  economic  generalizations  cer- 
tainly do  not,  as,  for  example,  the  assumption  that  in  economic 
affairs  all  men  act  in  entire  selfishness.  All  that  can  justifiably  be 
asked  here  is  whether  this  is  prevaihngly  true  in  a  degree  to  justify 
the  choice  of  selfish  motive  as  the  leading  and  controlling  influence. 
Minor  disturbing  factors  may  then  be  trusted  to  be  inconsiderable  in 
effect  or  to  offset  or  cancel  one  another. 

It  is,  in  truth,  in  the  very  nature  of  scientific  generahzation  that 

^  But  out  of  a  case  of  absolute  indifference  —  complete  and  per- 
fect marginality  —  can  any  decision  or  action  follow?  As  in 
mechanics,  must  there  not  occur  something  like  a  dead  center? 
There  are,  in  fact,  cases  of  pathological  mental  conditions  in  which 
the  patient  brushes,  for  example,  upon  the  problem  of  which  slipper 
to  put  on  first,  and,  there  being  no  particular  reason  for  preference, 
hangs  fire  indefinitely  between  the  alternatives  —  completely  non- 
plused. 

In  normal  psychology,  however,  all  attention  and  all  emotion 
are  rhythmical  or  vibratory  —  hke  all  physical  and  physiological 
movements.  Therefore  a  precise  indifference  must  be  temporary, 
and  must  be  displaced  by  alternations  from  one  side  to  the  other 
of  the  line  of  the  dead  center,  as  the  emphasis  of  desire  or  attention 
shifts. 


102  THE  ECONOMICS  OF  ENTERPRISE 

it  often  does  violencp  to  the  infinite  complexity  of  the  actual  con- 
crete phenomena.  It  must  often  abstract  —  must  often  select 
some  leading  force  or  aspect  in  a  problem,  and  disjjose  of  secondary 
influences  by  this  method  of  offset,  or  under  the  assumption  that 
other  things  are  equal.  So,  even  if  this  marginal-utiUty  generaliza- 
tion were  admittedly  of  this  sort,  its  justification  need  not  be  hope- 
less. The  inductive  method,  valid  in  other  fields  of  science,  could 
be  appealed  to  here :  A  tentative  generalization  is  suggested  by 
the  facts.  If  this  generalization,  when  apphed  in  the  widest  way 
to  the  entire  field  of  facts,  is  supported  by  them,  in  the  sense  that  it 
affords  an  intelligible  and  consistent  explanation  of  them,  a  scien- 
tific law  is  provisionall}'^  established.  Precisely  of  this  sort  is  the 
explanation  offered  under  the  marginal  utility  doctrine:  (1)  it  is 
probable  that  by  introspection  of  his  mental  processes  each  indi- 
vidual will  find  that,  in  a  general  way  in  making  his  purchases,  he 
acts  in  conformity  with  the  principle  proposed ;  (2)  the  generaliza- 
tion then  meets  strong  inductive  verification  in  the  fact  that  prices 
do  adjust  upon  the  market  and  do  rise  and  fall  in  the  precise  manner 
which  the  marginal  principle  requires  and  foretells ;  the  facts  cor- 
roborate the  theory.  For,  after  all,  why  is  it  that  as  prices  rise 
many  prospective  purchasers  are  retired  and  spend  their  money 
for  other  things,  and  that  as  prices  fall  lower  levels  of  price-paying 
disposition  are  uncovered  and  purchasing  increases?  Why  is  it 
that  no  one  of  us  wiU  submit  to  unlimited  advances  in  price — that  as 
goods  go  up  in  price  we  reduce  or  cease  our  purchases?  Our  theory 
does  explain  these  market  movements  on  the  demand  side,  and  ex- 
plains them  adequately,  and  explains  them  in  general  conformity 
with  human  nature.  The  reasoning  or  the  analysis  may,  it  is  true, 
be  later  supplemented  by  further  study  or  may  be  modified  in  detail  ; 
but  it  will  hardly  be  subjected  to  any  general  discrediting. 
Rightly  understood,  —  utiUty  meaning  merely  the  fact  that  a 
thing  is  wanted,  —  the  marginal  utility  doctrine  is  almost  an 
axiom. 

Market  demand :  Summary.  —  The  fact  that  a  thing  is 
desired  we  call  its  utility :  having  utility  it  thereby  comes  to 
be  called  a  good. 

As  bearing  on  price,  utility  must  be  a  matter  entirely 
within  the  individual  psychology,  since  desire  is  so. 

All  market  demands  are  price  demands ;  desire,  as  such, 
does  not  appear  in  the  market ;  utility  without  purchasing 
power  is  irrelevant  to  market  movements. 


UTILITY,   DEMAND,   SUPPLY  103 

There  could,  however,  be  no  price  demand  in  the  absence 
of  utility;  money  will  not  be  paid  for  a  thing  if  no  desire 
exists  for  the  thing. 

But  whether  money  will  be  paid,  and  how  much,  depends, 
in  part,  upon  the  relative  strength  of  the  desire  for  other 
things,  their  utility. 

But  the  strength  of  the  desire  for  any  good,  as  this  desire 
bears  upon  price  offer,  is  not  a  question  of  the  utility  of  the 
good  in  general  or  in  the  mass  or  in  the  average,  but  a  question 
of  the  added  utility  which  will  accrue  with  the  addition  of 
the  particular  item  under  consideration. 

For  the  bidder,  this  additional  utility  with  the  added 
unit  —  or,  for  the  seller,  the  loss  in  aggregate  utility  attend- 
ing the  loss  of  a  unit  —  is  termed  the  marginal  utility. 

Utility  may  exist  without  scarcity,  but  marginal  utility 
cannot.  Mathematically  speaking,  the  marginal  utility  of 
goods  that  are  not  scarce  is  zero. 

Thus  the  emergence  of  an  individual's  price  offer  is  condi- 
tioned by  the  presence  not  merely  of  utility,  but  of  mar- 
ginal utility. 

(Marginal  utility  is,  then,  not  exclusively  a  matter  of 
desire;  the  intensity  of  the  desire  for  the  final  unit  implies 
a  supply  influence  in  the  case.) 

The  direction  of  the  use  of  purchasing  power  —  or  the 
sale  of  goods  for  purchasing  power  —  is  a  derivative  not  from 
one  marginal  utility  alone  but  from  a  decision  between  al- 
ternative marginal  utilities. 

Therefore  an  individual's  utility  curve  may  be  plotted, 
or  his  price-offer  curve  for  any  particular  commodity;  or 
an  aggregate,  or  social,  price-offer  curve;  but  no  social 
utility  curve.  And  no  price  offer  anywhere  is  expressive 
of  absolute,  but  only  of  relative,  marginal  utility.  It  would 
be  possible,  also,  to  interpret  the  ordinary  market  demand 
curve  so  as  to  report  the  varying  volumes  of  a  commodity 
which  the  market  demand  would  absorb  at  a  series  of  dif- 
ferent prices. 

Summary  of  Chapter :  Money  demands  are  not  inscrutable 
data  in  the  problem  of  price.  They  require  explanation  equally 


10-4      THE  ECONOMICS  OF  ENTERPRISE 

with  supply.  Utility  alone,  the  fact  that  an  individual  wants 
a  thing,  does  not  explain  either  the  necessity  that  he  pay  for  it 
or  his  disposition  to  pay  for  it.  Unless  the  supply  is  limited, 
no  one  needs  to  pay.  The  limitation  upon  the  supply,  the 
scarcity  of  a  useful  thing  relatively  to  the  need,  is  funda- 
mental to  the  disposition  of  any  individual  to  i)ay  money,  or 
anything  else,  for  it.  The  satiability  of  any  desire  at  any 
given  time,  the  falling  utility  of  each  added  item  in  an  individ- 
ual's stock  of  any  good,  leads  to  the  recognition  of  marginal 
utility  —  that  utility  attending  the  least  important  desire 
satisfied  by  any  item  in  the  stock  —  that  desire  which  will  be 
deprived  of  satisfaction  with  the  loss  of  any  one  item. 

But  marginal  utility  does  not  explain  the  disposition  of  any 
individual  to  pay  a  price.  Not  only  must  he  have  the  pur- 
chasmg  power,  but  also  he  must  decide  in  what  direction  to 
apply  it.  To  buy  one  thing  means  to  go  without  an  alterna- 
tive thing.  Therefore  the  decision  to  purchase  is  arrived  at 
only  as  a  choice  between  competing  marginal  utilities.  The 
steps,  then,  are  from  (1)  utility  to  (2)  marginal  utility, 
thence  to  (3)  the  comparison  of  marginal  utilities,  and  finally 
to  (4)  price  offer. 

Marginality  in  demand  means,  then,  merely  that  at  any 
higher  price  for  the  good  in  question  the  individual  would 
prefer  to  retain  his  purchasing  power  for  some  other  use.  To 
be  above  the  margin  means  that  the  marginal  utility  of  the 
good  in  question  outranks  by  some  greater  or  smaller  differ- 
ential the  marginal  utility  of  any  competing  good.  To  be 
upon  the  margin  is  merely  to  recognize  a  ratio  of  equality 
between  competing  and  alternative  marginal  utilities.  It 
follows,  then,  that  an  individual's  maximum  money  demand 
for  a  good  implies  nothing  more  as  to  the  magnitude  of 
the  marginal  utility  to  him,  or  as  to  the  magnitude  of  the  com- 
peting marginal  utility,  than  is  involved  in  the  fact  that 
these  competing  marginal  utilities  are  approximately  equal. 
Nor  does  the  fact  that  two  individuals  are  marginal  at  the 
same  purchase  price  imply  that  the  marginal  utilities  re- 
spectively involved  are  equal,  but  only  that  the  ratios  are 
the  same  between  the  utility  in  question  and  the  utility 
foregone.  And  finally  :  utility  being  purely  a  relation  to  an 
individual,  and  men  being  different — their  desires  different 
and  incommensurable,  and  their  money  resources  different  — 
there  is  no  possibility  of  finding,  either  in  the  demand  price 
of  any  individual  or  in  the  market  price,  any  expression  or 


UTILITY,   DEMAND,   SUPPLY  105 

measure  of  utility  or  of  marginal  utility.  Utility  at  large, 
or  social  utility,  therefore,  is  sheer  nonsense  for  all  purposes 
of  the  price  analysis. 

Account  having  now  been  rendered  of  demand  as  it  is  re- 
lated to  utility,  and  of  supply  as  it  is  related  to  cost  of 
production,  and  of  demand  and  supply  together  as  they  are 
equated  against  each  other  in  the  process  of  price  adjustment, 
it  will  be  the  task  of  the  next  chapter  to  show  that  cost  of 
production  —  even  with  demand  assumed  and  with  cost  in- 
terpreted to  take  account  of  displaced  and  competing  oppor- 
tunity —  is  rather  an  indication  of  the  direction  in  which  a 
solution  of  the  price  problem  is  to  be  sought  than  an  ulti- 
mate solution  of  the  problem ;  that  it  is  purely  an  entrepre- 
neur computation,  adequate  and  ultimate  for  the  purposes 
of  the  entrepreneur  in  his  separate  and  individual  pursuit  of 
private  gain,  and  an  inevitable  and  even  a  central  fact  in  the 
competitive  process,  but  neither  adequate  nor  ultimate  for 
the  purposes  of  explaining  market  price  ;  that,  as  intended  to 
ofTer  an  ultimate  explanation  of  price,  cost  of  production  is, 
indeed,  patently  circuitous;  that  it  purports  to  explain  the 
prices  of  products  purely  by  an  appeal  to  other  prices  —  to 
the  prices  of  the  materials  consumed,  to  the  price  wages  of 
the  labor  applied,  and  to  the  price  rents  of  the  lands  and  in- 
struments employed.  It  will  also  be  made  clear  that  pre- 
cisely because  the  process  of  the  distribution  of  wealth  in 
present  society  is  a  price  process  —  is,  indeed,  merely  one 
phase  or  aspect  of  the  price  problem  in  general  —  the  distrib- 
utive problem  equally  with  the  price  problem  finds  no  ulti- 
mate solution  in  cost  of  production ;  that  such,  indeed,  must 
be  the  case,  since,  for  the  most  part,  costs  of  production  and 
distributive  shares  are  merely  two  different  names  for  one 
and  the  same  thing. 


CHAPTER  VIII 

THE    SIGNIFICANCE    OF    COST    OF    PRODUCTION 

What  determines  the  cost.  —  In  view  of  the  foregoing  dis- 
cussions, it  must  appear  odd  that  economists  should  ever 
have  been  content  with  cost  of  production  as  an  explanation 
either  of  the  price  of  any  one  good  or  of  the  relative  prices 
of  different  goods.  In  truth,  however,  they  have  never 
been  generally  content,  so  far  as  concerns  the  attempt  to 
explain  price  by  entrepreneur  cost  of  production.  Those 
cost  explanations  of  market  price  which  have  commanded 
serious  advocacy  have  all  of  them  been  attempts  to  delve 
beneath  the  mere  entrepreneur  payments  and  to  search 
out  the  causes  determinative  of  these  payments.  Does  the 
employer  have  to  pay  high  wages?  Some  economists  have 
explained  this  by  the  painfulness  or  danger  or  other  dis- 
advantage attaching  directly  to  the  work  required.  And 
in  those  cases  where  the  pay  for  the  work  is  only  relatively 
high,  appeal  has  been  made  to  the  relatively  great  irksome- 
ness  or  painfulness.  This  view  of  the  case  really  finds  the 
determinant  of  the  expense  cost  of  the  employer  in  the  labor- 
pain  cost  of  his  employees.  Fundamentally  it  is  an  employee 
cost  doctrine  and  not  an  entrepreneur  doctrine  —  or  rather 
it  finds  in  the  pain  cost  of  the  employee  the  cause  of  the 
money  cost  of  the  employer.  So,  for  example,  the  great 
economist  Ricardo  held  that  the  relative  prices  of  products 
are  due  to  the  relative  amounts  of  labor  involved  in  their 
production.  But  he  was  not  the  less  emphatic  in  his  insist- 
ence that  prices  were  proportionate  to  the  costs  of  the 
employer ;  this  was  very  clear  to  him.  But  these  employer 
costs  were  in  turn  proportionate  to  the  employees'  labor 
burdens.  Thus,  the  relative  amounts  of  labor  determined 
the  relative  expenses  of  the  employers,  and  these  relative 
expenses  determined  in  their  turn  the  relative  prices ;  whence 

106 


SIGNIFICANCE  OF  COST  OF  PRODUCTION       107 

it  followed  that  the  labor  cost  was  the  ultimate  determinant 
of  the  market  price. 

Does  pain  determine  cost?  —  It  is  not  at  present  worth 
while  to  go  far  in  criticism  of  this  doctrine.  It  simply  is  not 
true  that  the  pay  received  for  work  is  proportional  to  the 
pain  or  to  the  general  unattractiveness  of  the  work.  The 
wage  is  affected  by  the  supply  of  laborers  offering  for  the 
work,  and  this  supply  may  in  turn  be  seriously  influenced 
by  the  unattractiveness  of  the  work.  But  despite  the  un- 
attractiveness, the  supply  of  men  fit  for  nothing  else  is  often 
so  great  that  the  wage  is  a  low  one,  and  low  out  of  all  pro- 
portion to  the  pains.  Other  occupations  in  turn  are  gener- 
ously rewarded  despite  the  fact  that  they  are  exceptionally 
pleasant  occupations ;  compare  the  prima  donna  with  the 
servant  girl.  On  the  whole  it  is  perhaps  more  nearly  true 
that  the  more  attractive  occupations  get  the  higher  rewards. 
And  the  Ricardian  view  is  even  more  unsatisfactory  as  an  ex- 
planation for  the  relative  hire  of  different  lands  and  of  differ- 
ent sorts  of  other  productive  equipment  than  as  an  explana- 
tion of  the  prices  of  products.  Pain  appears,  indeed,  to  be 
irrelevant  to  these  particular  compensations. 

But  no  matter  how  bad  this  labor-pain  cost  explanation 
of  entrepreneur  cost  may  be,  it  is  still  to  our  purpose  as 
illustrative  of  the  general  unwillingness  of  economists  to 
stop  at  mere  entrepreneur  cost  as  an  ultimate  explanation 
of  market  price.  In  truth  no  capable  economist  ever  did 
so  stop.  Nor  can  we.  The  circuity  in  the  argument  is 
obvious  :  entrepreneur  cost  explains  the  price  of  the  product 
by  appealing  to  the  prices  of  the  productive  factors.  It 
traces  the  price  of  the  product  to  the  price  of  the  costs  en- 
tering into  the  product ;  and  forthwith  it  proceeds  to  explain 
the  prices  of  the  productive  factors  —  the  costs  —  by  the 
price  of  their  joint  product.^ 

^  "  The  price  of  pig 
Is  sometliing  big ; 

Because  its  corn,  you'll  understand, 
Is  high-priced,  too ; 
Because  it  grew 
Upon  the  high-priced  farming  land. 


108  /"///';  ECONOMICS  OF  ENTERPRISE 

But  entrepreneur  cost  is  superficial.  —  The  truth  clearly 
is  that  the  labor-pain  theory  of  price,  purporting  to  base 
the  entrepreneur  level  of  price  costs  upon  an  underlying 
stratum  of  "  real  "  costs,  attempts  to  arrive  at  a  fundamental 
explanation  of  price,  and  arrives  merely  at  a  false  explana- 
tion; while  the  entrepreneur  view  of  cost  of  production, 
in  its  care  to  remain  a  correct  explanation,  gives  up  the 
possibility  of  becoming  an  ultimate  explanation.  The  entre- 
preneur doctrine  of  cost  gets  no  further  toward  explaining 
the  prices  of  products  than  to  explain  some  prices  by  other 
prices  —  the  price  of  the  product  by  what  the  factors  enter- 
ing into  it  cost.  But  this  leaves  these  cost  prices  unex- 
plained. And  if  they  are  explained  by  the  price  of  the  prod- 
uct, this,  in  turn,  leaves  the  price  of  the  product  without 
explanation.  Nor  does  an  appeal  to  opportunity  cost  re- 
lease us  from  the  circuity  or  move  us  nearer  to  the  funda- 
mentals in  the  problem.  An  opportunity  to  produce  some- 
thing else  is  sacrificed  in  producing  the  actual  product ;  but 
it  was  an  opportunity  to  produce  another  thing  bearing  a 
price;  and  this  other  thing  enters  into  our  problem  not  as 
a  foregone  thing  merely  but  as  a  priced  thing,  a  displaced 
price  product.  Thus  opportunity  conceived  as  cost  becomes 
a  price  fact,  just  as  is  the  thing  that  is  actually  produced, 
and  just  as  is  each  wage  and  material  and  rent  item  in  the 
ordinary  cost  explanation  of  price.  It  is  certainly  necessary 
to  take  account  of  opportunity  costs,  precisely  because  the 
entrepreneur  does  actually  take  account  of  them  in  deciding 
whether  or  not  to  produce  in  any  given  line.  They  must 
be  in  the  doctrine  because  they  are  in  the  facts.  It  is,  in- 
deed, only  by  recognizing  these  opportunity  costs  that  the 
cost  analysis  can  present  a  complete  and  truthful  account 
of  cost  as  it  actually  is  and  as  it  actually  functions  in  the 
determination  of  supply.     But  the  same  vice  of  attempting 

If  you'd  know  why 
That  land  is  high, 
^  Consider  this  :  its  price  is  big 

Because  it  pays 
Thereon  to  raise 
The  costly  corn,  the  high-priced  pig  !  " 


SIGNIFICANCE  OF  COST  OF  PRODUCTION      109 

to  explain  one  price  as  product  by  another  price  as  cost 
attends  opportunity  cost  that  attends  other  costs.  If 
opportunity  costs  are  in  any  respect  better  than  the  other 
costs,  it  is  not  in  being  less  superficial,  but  only  in  being  less 
obtrusively  so :  the  other  costs  appear  to  derive  their  prices 
from  the  very  products  the  prices  of  which  they  purport 
to  have  determined ;  opportunity  costs,  however,  derive 
their  price  standing  from  alternative  possible  price  products 
which,  as  displaced,  never  became  actual.  But  either  sort 
of  cost,  as  an  explanation  of  price,  is  an  attempt  to  explain 
particular  prices  by  other  prices. 

Why  cost  is  important.  —  But  that  this  entrepreneur 
computation  of  costs  is  plainly  superficial  is  no  denial  of 
its  actuality  or  of  its  supreme  importance  as  an  intermediate 
step  in  the  great  value  problem.  The  very  fact  that  all 
the  underlying  and  determining  influences  focus  in  the  cost 
computation  is  alone  sufficient  to  establish  this.  We  live 
in  a  society  organized  under  competitive  entrepreneur 
production.  Modifications  in  the  relative  supplies  of  goods 
come  about  through  the  working  out  by  the  entrepreneurs 
of  their  individual  cost  computations.  The  whole  process 
is  captained  by  them.  All  of  its  forces  and  determinants 
manifest  their  influence  and  obtain  their  expression  in  terms 
of  the  cost  computations  of  the  entrepreneurs.  Are  rents 
for  certain  lands  high?  The  entrepreneur  has  found  it 
worth  his  while  to  bid  thus  high  for  these  lands  because, 
being  scarce,  their  products  sell  high.  The  ultimate  explana- 
tion for  the  prices  is  not  with  the  entrepreneur  but  with 
the  supply  of  land  and  of  other  factors  of  production,  as 
over  against  the  desire  for  land  products  and  for  other  prod- 
ucts. Thus  the  point  of  view  from  which  to  attack  this 
problem  of  causes  is  the  entrepreneur  point  of  view,  pre- 
cisely because  here  the  problem  is  presented  in  terms  of  the 
results  which  the  ultimate  causes  have  worked  and  of  the 
conditions  which  these  ultimate  causes  have  established. 
We  study  the  causes  of  price  from  the  entrepreneur  point 
of  view,  simply  because  it  is  through  the  entrepreneur  pro- 
cess that  the  ultimate  causes  are  forced  to  obtain  expression 
in  a  competitive  society.     Science  is  doubtless  more  than 


no  THE  ECONOMICS  OF  ENTERPRISE 

a  mere  description  —  generalized  so  as  to  be  manageable  — 
of  the  way  in  which  things  happen ;  but  thus  much  at  least 
it  must  be.  In  addition,  there  is  need  that  its  generaliza- 
tions run  in  terms  of  the  causal  sequences  involved.  By 
the  test  of  either  requirement,  we  must  study  an  entre- 
preneur economics  in  terms  of  the  entrepreneur  process. 

Cost  is  pivotal  in  competitive  production.  —  In  no  field 
of  economic  activity,  and  therefore  in  no  field  of  economic 
analysis,  are  we  ever  far  removed  from  this  entrepreneur 
process  of  the  adjustment  of  production  and  of  prices.  It 
is,  as  we  have  seen,  through  the  entrepreneur  computation 
of  costs  that  supplies  are  flexible  in  the  market  and  therefore 
come  to  be  adjusted  against  the  demand.  It  is,  in  fact,  the 
entrepreneur  who  furnishes  the  demand  for  all  intermediate 
goods  —  the  raw  materials  and  the  instruments  of  production 
—  the  things  which  are  called  production  goods  as  distin- 
guished from  consumption  goods.  The  entrepreneurs  are 
the  bidders  for  the  labor  and  the  payers  of  the  wages.  It  is 
by  the  competition  of  the  entrepreneurs  of  each  industry 
with  the  other  entrepreneurs  of  that  same  industry,  and  of 
the  competition  of  the  entrepreneurs  of  each  industry  with 
those  of  other  industries,  that  wages  in  particular  and  wages 
in  general  find  a  level.  So  the  rates  of  interest  on  capital 
funds,  and  the  rents  of  lands  and  of  other  productive  equip- 
ment, are  adjusted  mostly  or  entirely  through  entrepreneur 
bidding.  The  various  incomes  apportioned  under  entre- 
preneur bidding  to  the  various  production  goods  rank  by 
that  very  fact  as  items  of  cost  in  the  process  of  placing 
goods  upon  the  market.  The  entrepreneurs  pay  these  vari- 
ous rents  and  hires  because  of  the  prices  to  be  obtained  for 
the  products.  It  is  in  truth  precisely  this  entrepreneur 
point  of  view  which  gives  to  the  market  prices  of  products 
this  appearance  of  being  the  causes  of  the  prices  of  the 
productive  factors  in  the  computation  of  costs.  And  it  is 
equally  this  same  entrepreneur  point  of  view  which  makes 
the  prices  of  these  productive  factors  appear  to  be  the  causes 
of  the  prices  of  the  products. 

It  is,  therefore,  precisely  at  this  point  that  it  becomes  neces- 
sary to  explain  the  price  costs  without  any  attempt  to  de- 


SIGNIFICANCE  OF  COST  OF  PRODUCTION      111 

duce  these  from  the  prices  of  their  products,  and  to  explain 
the  prices  of  the  products  without  deducing  these  from  tlieir 
price-costs.  It  is  the  particularistic  and  individualistic 
nature  of  the  entrepreneur's  activities  and  computations 
that  explains  his  ambiguous  formulations  of  causation  and 
his  perplexing  circuities  of  logic.  But  somehow,  none  the 
less,  the  problem  must  be  seen  in  the  large  and  as  a  whole, 
and  yet  not  inconsistently  with  the  particularistic  process. 
Otherwise  the  logic  must  always  be  Janus-faced.  The  funda- 
mentals of  the  problem  must  be  articulated  with  the  process 
as  it  actually  takes  place. 

The  causes  that  underlie  costs.  —  It  is  in  this  aspect 
that  our  earlier  study  of  the  organism  and  of  the  environ- 
ment offers  its  especial  service.  Man  as  consumer  is  the 
end  of  the  economic  process,  its  purpose  and  its  justification. 
His  wants  are,  therefore,  fundamental  in  the  case.  But  he 
is  not  merely  the  end ;  as  producer  he  is  also  means  to  the 
end. 

Therefore,  over  against  the  human  need  for  goods,  there 
is  to  be  set  the  human  being  as  producer  together  with  his 
external  equipment  of  auxiliaries  (instrumental  and  interme- 
diate goods).  Taking  for  the  time  being  his  needs  for 
granted,  the  relative  prices  of  different  goods  must  trace 
back  to  the  relative  scarcity  of  the  economic  ability  to  pro- 
duce them,  or  to  the  relative  scarcity  of  the  appropriate 
equipment,  or  to  both  in  conjunction.  The  causal  sequence 
on  the  supply  side  of  the  problem  runs  from  the  relative 
scarcity  of  the  factor  to  the  relative  scarcity  of  its  product, 
thence  to  the  relatively  high  price  of  the  product,  thence  to 
the  relatively  high  remuneration  of  the  factor. 

The  cause  of  the  market  price  of  the  product  is,  therefore, 
on  the  supply  side,  not  the  high  rewards  of  the  contributing 
factors  but  the  scarcity  of  them,  which  scarcity  explains  the 
scarcity  of  the  product.  It  is  this  relative  scarcity  of  the 
factors  that  ultimately  explains  their  relative  positions  as 
costs.  But  the  hire  of  any  factor  as  cost  gets  its  immediate 
explanation  not  directly  from  the  scarcity  of  the  product 
but,  as  an  entrepreneur  computation,  from  the  price  of  that 
product,  which  price  is  in  turn  due  to  the  scarcity.     Each 


112  THE  ECONOMICS  OF  ENTERPRISE 

individual  entreprenour,  in  his  private  search  for  private 
gain,  schemes  and  contrives  and  adjusts  within  this  large 
general  situation  ;  is  mostly  determined  by  it ;  and  finds  no 
ultimate  cause  for  an>i:hing ;  and  needs  look  for  none.  His 
motive  for  the  hiring  of  factors  is  to  place  upon  the  market 
a  price  product.  The  limitations  upon  his  individual  prod- 
uct are  set  by  the  prices  imposed  upon  him  for  the  necessary 
factors.  The  whole  price  situation  presents  itself  to  him  as 
causal  of  his  costs  and  as  set  over  against  the  demand  prices 
which  customers  will  consent  to  pay  for  his  particular  prod- 
uct. He  stands  merely  as  an  intermediary  in  the  case,  repre- 
senting, in  his  hiring  or  bujdng  of  productive  factors,  the 
demand  of  the  purchasing  public,  and  representing,  in  his 
cost  computations,  the  degree  of  scarcity  of  the  productive 
factors  relative  to  the  demand  for  their  products.  Thus  on 
neither  side  is  he  the  ultimate  cause.  He  is  merely  an  agent 
directing  the  process  through  which  an  adjustment  is  reached 
among  all  the  influences  focusing  upon  him  —  on  the  one 
side,  all  the  different  desires  for  goods  as  they  are  represented 
and  expressed  in  price  offers ;  on  the  other  side,  (1)  the 
aggregate  human  productive  ability  for  his  purpose,  (2) 
the  aggregate  intermediate  equipment.  We  say  that  he  is 
merely  a  result  and  not  a  cause.  Yet  clearly  enough,  as 
one  item  of  human  productive  power,  he  is  in  so  far  a  part 
of  the  total  cause.  Through  his  choices  and  his  changes 
of  productive  activity  he  reacts  upon  the  great  situation 
that  he  faces  and  is,  therefore,  in  some  degree  a  cause  to 
modify  it.  It  is  by  entrepreneur  bidding  that  the  factors 
of  production  receive  their  prices  and  change  their  prices. 
This  bidding  is  done  and  the  prices  are  paid  in  view  of  the 
marketable  product  which  is  in  prospect.  Thus  the  expected 
product  is  at  once  the  purpose  of  the  bids,  the  justification 
for  them,  and  the  limit  upon  them.  The  joint  product  of 
the  cooperating  factors  is  a  price  fund  to  be  divided  among 
them.  It  is,  then,  by  the  process  of  entrepreneur  bidding 
that  this  division  of  the  joint  price  product  —  the  distribu- 
tion of  it  —  is  made  among  the  different  claimants  to  it. 
The  prices  upon  the  factors  are  the  costs  of  their  product  — 
a  product  which  is  significant  as  product  only  by  virtue  of 


SIGNIFICANCE  OF  COST  OF  PRODUCTION       113 

its  price  and  in  the  degree  of  its  price.  The  product  is  a 
price  item  and  the  factors  are  price  items.  The  prices  paid 
for  the  factors  are,  then,  distributive  shares  out  of  the  prod- 
uct derived  from  them.  And  since  the  costs  are  price  items 
and  the  products  price  items,  it  is  evident  that  the  problem 
of  the  prices  of  the  products  and  the  problem  of  the  price 
shares  distributed  out  of  the  products  —  the  costs  —  are 
merely  different  aspects  of  the  one  great  and  inclusive  prob- 
lem of  market  price. 

The  moving  equilibrium.  —  The  truth  is  that  the  vice  of 
circuity  is  everywhere  difficult  to  avoid  in  reasoning  upon 
the  problem  of  price.  Prices  have  their  setting  in  a  great 
moving  equilibrium,  all  the  parts  of  which  are  related  to 
all  the  other  parts,  and  are  in  close  interdependence  with 
them.  As  one  part  changes,  others  and  then  still  others 
change.  The  lines  of  causation  are  not  easy  to  trace  or 
even  the  direction  of  them  easy  to  establish.  Almost  any- 
thing may  plausibly  appear  as  the  cause  or  the  result 
of  almost  anything  else.  Where,  if  anywhere,  are  the 
ultimate  determinants?  Is  there,  indeed,  casually  or  logi- 
cally, either  beginning  or  end  to  be  discovered?  We  start 
with  the  entirely  correct  assumption  that  the  market  price 
of  any  one  commodity  is  determined  by  the  demand  for  it 
and  the  supply  of  it,  and  that  this  price  is  the  equating  point 
between  the  demand  and  the  supply.  But  note  that  this  way 
of  formulating  the  price  problem  concerns  itself  with  only 
one  commodity  at  a  time.  Prices  are  tacitly  taken  for 
granted  as  already  fixed  for  all  other  lines  of  production. 
Thereupon  certain  maximum  paying  dispositions  are  as- 
cribed to  the  respective  individuals  demanding  the  com- 
modity in  question.  But  why  these  maxima?  Why  does 
a  particular  individual  limit  his  payment  to  say  $10?  It  is 
precisely  that  to  this  $10  there  already  attaches  a  purchasing 
power  over  other  things.  That  a  purchaser  is  marginal  at 
$10  means  that  at  any  price  above  $10  for  the  article  under 
consideration  he  would  rather  buy  something  else.  Our 
analysis  of  the  forces  determinative  of  the  demand  side  of 
any  one  price  equation  proceeds,  therefore,  upon  the  assump- 


114  THE  ECONOMICS  OF  ENTERPRISE 

tion  of  an  existing  medium  of  exchange  and  of  an  established 
general  price  situation,  —  assumes,  that  is  to  say,  an  existing 
system  of  prices  upon  goods  in  general  and  an  established 
price  relation  for  these  goods  in  terms  of  money.  And  were 
there  no  money  in  the  case,  were  trading  confined  to  barter, 
a  decision  to  pay  not  more  than  10  sheep  for  one  horse  must 
be  arrived  at  in  view  of  what  the  sheep  would  buy  of  other 
things  than  horses. 

Or  consider  this  same  difficulty  in  another  aspect :  Money 
comes  to  be  offered  for  any  given  commodity,  say  hats,  by  virtue 
of  the  fact  that  possessors  of  other  commodities  have  changed  these 
over  into  money  to  be  used  as  purchasing  power. 

These  other  commodities  are  of  indefinitely  various  sorts.  The 
money  demand  for  hats  sums  up,  therefore,  countless  different 
dispositions  to  barter  different  conmiodities  for  hats.  In  each 
case  of  the  exchange  of  these  other  goods  into  the  money  with  which 
to  buy  hats,  the  desirability  of  the  trade  depends  upon  the  amount 
of  money  that  these  other  goods  can  be  changed  over  into.  The 
money  demand  for  hats  can,  then,  only  schematically  be  set  apart 
from  the  money  price  of  other  things. 

The  supply  aspect  of  the  moving  equilibrium.  —  Similar 
difficulties  present  themselves  upon  the  other  side,  the  sup- 
ply side,  of  the  market  equation.  The  disposition  of  a  seller 
to  insist  upon  a  certain  price  expresses  merely  the  fact  that  at 
less  than  this  price  he  would  prefer  the  thing  in  hand  to  anything 
else  that  the  money  would  buy.  Other  exchange  relations,  an 
established  system  of  prices  for  other  commodities,  are  really  in- 
volved in  the  fixation  of  the  price  at  which  any  one  commodity 
will  be  offered  for  sale  by  anj^  individual. 

Cost  of  production  likewise,  as  lying  behind  the  reservation 
price  of  any  seller,  points  commonly  and  mainly  to  the  price  pro- 
ductiveness open  to  the  entrepreneur  in  other  lines  of  production : 
the  farmer,  for  example,  must  have  a  certain  price  per  bushel  for 
his  wheat,  else  he  will  produce  corn  or  hay  or  wool.  The  cost 
of  producing  one  price  fact  must  commonly  afford  an  indemnity 
for  not  producing  an  alternative  price  fact.  The  supply  of  any 
commodity  is,  therefore,  inseparably  connected  with,  the  prices 
of  all  other  producible  goods,  precisely  as  the  paying  disposition 
for  any  particular  fine  of  goods  is  inseparably  connected  with  the 
paying  dispositions  for  all  alternative  goods. 


SIGNIFICANCE  OF  COST  OF  PRODUCTION       115 

What,  then,  can  be  done  ?  —  If  both  the  demand  concept  and 
the  supply  concept  are  valid  to  explain  a  particular  market  price 
only  upon  the  assumption  of  an  otherwise  complete  and  adjusted 
price  situation ;  if  the  usual  interpretations  of  cost  are  incom- 
plete, and  superficial ;  and  if  any  amended  doctrine  of  cost  can 
be  better  only  in  being  made  exhaustive  and  actual,  but  must  be 
equally  open  to  the  charge  of  supcrficiality  or  circuity,  —  where 
shall  be  found  an  explanation  causally  ultimate  and  logically 
adequate  ? 

It  is  still  necessary  to  explain  things  in  harmony  with  the  actual 
process  in  which  they  take  place  :  our  explanations  must  be  formu- 
lated consistently  with  the  existing  entrepreneur  on-going  of  things, 
and  at  the  same  time  must  be  formulated  in  terms  of  the  causes 
which  determine  and  direct  this  actual  on-going.  We  are  not  to 
rest  satisfied  with  the  fact  that,  for  example,  the  rent  is  high  or 
low  or  the  wage  outlay  this  or  that ;  we  must  go  farther  than  the 
entrepreneur  goes  in  explaining  what  the  entrepreneur  does.  We 
must,  that  is  to  say,  appeal  to  the  human  wants  which,  in  terms 
of  price-demand,  are  making  call  upon  the  productive  powers, 
human  or  environmental,  which  the  entrepreneur  employs  for 
hire.  On  the  cost  side  of  the  case,  not  the  rents  paid  for  land, 
but  the  lands  available  for  supplying  product,  are  the  explanation 
of  this  supply  and  of  its  price.  So  with  wage  costs :  it  is  the  labor 
supply  and  not  the  wages  which  are  fundamental  in  the  situation. 
In  coUectivistic  production  the  problem  would  present  essentially 
the  same  determinative  influences  but  the  process  would  be  another. 
In  the  present  price  system,  the  process  is  the  entrepreneur  process. 
It  is  the  entrepreneurs  whose  gain-making  activities  furnish  the 
guidance  and  the  direction  under  which  the  underlying  conditions 
and  causes  reach  expression.  It  is  the  entrepreneurs  who  dis- 
tribute the  productive  agents  and  instruments  into  their  different 
channels  in  response  to  the  pressure  of  human  needs  as  expressed 
in  competing  price  demands.  It  is  through  the  bidding  of  compet- 
ing entrepreneurs  that  prices  are  attached  to  the  materials  that 
enter  into  the  productive  process,  and  that  the  various  hires  accrue 
to  the  various  productive  factors.  But  the  fundamental  facts 
that  face  the  entrepreneurs,  the  conditions  within  which  they  work, 
the  energies  that  they  supervise,  the  forces  that  they  adjust  into 
a  market  equilibrium,  are  the  ultimate  situation  facts  —  on  the 
demand  side,  human  needs,  on  the  supply  side,  productive  equip- 
ment and  productive  ability.  In  the  cost  computations  of  the 
entrepreneurs  we  are  studying  the  case  in  the  form  of  the  actual 
process  ip.  which  the  thing  takes  place.     There  is  nothing  further 


116  THE  ECONOMICS  OF  ENTERPRISE 

possible  here  in  the  way  of  exiilanation  than  fully  and  accurately 
to  describe  the  process. 

But  each  factor  conditions  every  other ;  the  process  is  something 
larger  in  its  reach  tlum  the  activity  of  any  individual  entrepreneur; 
it  is  each  entrejireneur  ni  face  of  all  the  others,  and  all  together 
in  face  of  the  general  situation  of  needs  and  equipment  and  human 
productive  power.  Out  of  this  total  situation,  of  which  the  entre- 
preneurs make  a  part,  and  over  which  at  the  same  time  they  are 
the  supervisors  and  directors,  there  emerges  the  resultant  price 
adjustment.  To  the  individual  entrepreneur,  not  merely  these 
underljnng  and  determining  facts,  but  the  market  adjustment  flowing 
from  these  facts,  stand  as  definitive  data  which  he  is  powerless  to 
change  and  to  which  he  must  make  such  gainful  adjustment  for 
himself  as  he  may.  But  none  the  less  it  is  to  these  entrepre- 
neurs as  an  aggregate  that  this  market  adjustment  is  due,  — 
the  underljing  situation  being  taken  as  assumed.  Collectively 
they  are  the  cause  of  an  adjustment  which  appears  as  directive 
and  controlling  for  each  individual  entrepreneur  in  the  process. 
But  each  of  these  individuals  helps  in  turn  to  bring  about  this 
aggregate  adjustment.  Thus  the  activity  of  each  appears  to  be 
a  derivative  of  that  which  each  in  his  own  small  share  has  con- 
tributed to  estabUsh.  If  there  is  confusion  in  thinking  of  any  par- 
ticular fact  as  at  the  same  time  mostly  effect  but  partly  cause,  let 
one  again  imagine  himself  as  jumping,  the  last  person,  upon  a 
crowded  raft  and  sinking  with  it.  Does  he  sink  the  others  or 
do  they  sink  him?  So  the  entrepreneur  is  a  director  and  super- 
visor. But  in  part  he  creates  the  situation  which  he  directs  and 
supervises. 

We  have  seen  that  cost  of  production  is  the  entrepreneur's 
method  of  computing  in  terms  of  price  the  total  resistance  to 
production  —  of  arriving  at  the  price  which  he  must  receive 
if  he  produces  ;  that  this  computation  may  apply  to  an  item 
of  product  at  his  margin  of  production  or  to  any  volume  of 
his  product  as  a  whole ;  that  he  has  small  concern  with  the 
pains  or  burdens  or  sacrifices  of  his  employees  otherwise  than 
as  these  may  influence  his  outlays  in  wages ;  that  such  of  the 
outlays  as  attach  to  the  use  of  the  bounties  of  nature  can  have 
no  pain  cost  behind  them  ;  that  much  even  of  the  labor  which 
the  entrepreneur  employs  is  not  painful  to  those  who  perform 
it,  and  that  the  pay  of  the  different  laborers  bears  no  propor- 
tion to  the  painfulness  of  the  tasks  which  they  perform ;  and 
that  therefore  cost  of  production  as  entrepreneur  money  cost 


SIGNIFICANCE  OF  COST  OF  PRODUCTION      117 

is  incapable  of  direct  or  indirect  reduction  to  any  possible 
denominator  of  pain. 

And  further :  it  is  clear  that  the  money  costs  to  the  entre- 
preneur are  partly  due  to  the  attractiveness  of  alternative 
opportunities  for  gain ;  that  therefore  no  cost  of  production 
doctrine  is  adequate  or  accurate  which  does  not  take  account 
of  competing  opportunities  as  costs ;  and  that  such  costs  as 
attach  to  the  equipment  goods  owned  by  the  entrepreneur 
are  mere  foregone  opportunities,  and  lack  any  possible  refer- 
ence to  pain. 

But  it  has  also  been  made  clear  that,  even  with  demand 
taken  for  granted,  entrepreneur  cost  of  production  cannot 
stand  as  an  ultimate  explanation  of  price.  Offered  as  such 
explanation  it  is,  indeed,  both  circuitous  and  superficial ;  it 
purports  to  explain  some  prices  by  other  prices  —  the  price 
of  the  product  by  the  prices  of  the  costs.  If  the  pain  cost 
theory,  in  its  attempt  to  arrive  at  an  ultimate  explanation, 
avoids  superficiality  through  committing  itself  to  sheer  error, 
entrepreneur  cost  does  even  worse ;  it  avoids  error  by  stop- 
ping at  superficiality  or  even  circuity.  Nor  is  it  entirely 
consistent  in  its  circuity ;  for  it  alternates  between  regard- 
ing the  price  of  the  product  as  dependent  upon  what,  as 
costs,  the  different  factors  are  paid,  and  regarding  what  the 
different  factors  are  paid  as  dependent  upon  the  price  of  the 
product. 

The  same  circuity  vitiates  also  the  distributive  aspects  of 
the  price  problem,  precisely  because  the  distributive  shares 
are  mostly  the  same  sums  that  the  entrepreneur  computes 
as  his  costs ;  distributive  shares  to  the  recipients  are  costs  to 
the  entrepreneur.  Thus,  either  the  price  of  the  product  or 
the  prices  of  the  costs  (these  costs  being  mere  distributed 
fractions  of  the  product)  must  remain  unexplained. 

If,  however,  there  is  any  escape  from  this  circuity,  it  is 
solely  for  the  economist  to  seek  it.  The  cost  of  production 
computation,  however  neglectful  of  ultimate  bases  and  ex- 
planations, is  entirely  adequate  for  all  the  purposes  of  the 
entrepreneur.  It  is  no  business  of  his  to  explain  either  the 
necessity  of  his  outlays  or  the  prices  of  his  products,  but  only 
to  arrive  at  the  largest  possible  net  gain  from  his  efforts  and 
his  investment.  But  the  economist's  problem  is  quite  dis- 
tinct ;  he  must  really  explain  ;  and  part  of  his  difficulty  is  in 
the  fact  that  his  explanations  must  be  sought  within  the  actual 
situation  and  must  run  in  consistency  with  the  actual  entre- 


118  THE  ECONOMICS  OF  ENTERPRISE 

proneur  process.  He  must  accept  the  entrepreneur  function 
iind  the  entrepreneur  analysis;  but  he  must  carry  the  analy- 
sis further  than  the  entrepreneur  is  concerned  to  carry  it 
in  explaining  what  the  entre])reneur  does,  —  the  situation 
conditioning  his  activity,  the  forces  playing  upon  it,  and  the 
results  that  flow  from  it.  Thus  the  economist  must  recognize 
that  both  the  prices  of  the  products  and  the  prices  of  the 
bases  of  the  product  are  equally  results  of  the  underlying  and 
determining  conditions ;  that  neither  does  cost  ultimately 
fix  price  nor  price  ultimately  fix  cost ;  that  the  outlays  which 
the  entrepreneur  makes,  the  scarcity  of  the  products  which  he 
produces,  and  the  prices  at  which  he  must  sell  these  products, 
are  equally  the  results  of  the  limited  supply  of  the  productive 
factors  which  he  employs ;  and  thus  that,  with  the  demand 
for  the  products  taken  for  granted,  the  causal  sequence  on  the 
supply  side  of  the  problem  runs  from  the  relative  scarcity 
of  the  factors  to  the  relative  scarcity  of  the  products,  thence 
to  the  relative  prices  of  the  products,  thence  to  the  relative 
remunerations  of  the  factors.  These  remunerations  are 
forthwith  to  be  recognized  as  distributive  shares. 

It  thus  appears  that  costs  to  the  entrepreneur  are  merely 
the  guise  in  which,  in  an  entrepreneur  economy,  the  under- 
lymg  and  controlling  situation  of  human  needs  on  the  side  of 
demand,  and  of  productive  ability  and  productive  equip- 
ment on  the  side  of  supply,  present  themselves  to  the  entre- 
preneur and  bear  upon  him  in  his  process  of  placing  a  particu- 
lar product  upon  the  market.  Costs  are  merely  one  point  or 
aspect  —  but  the  central  point  or  aspect  —  in  the  process  of 
production  and  distribution  in  the  competitive  regime. 

The  following  chapter  will  be  devoted  to  an  analysis  of  the 
meaning  of  the  terms  producer  and  productive  in  the  competi- 
tive economy,  and  will  show  that  the  point  of  view  from 
which  production  and  productivity  must  be  interpreted  is  the 
private  and  individual  point  of  view ;  that  all  labor  and  all 
instruments  of  production  are  hired  and  paid  for  by  in- 
dividuals that  want  them,  and  are  wanted  for  their  service 
to  individual  gain ;  that  anything  that  aids  the  user  in  his 
quest  for  gain  is  productive  to  him ;  that  the  effect  upon 
others  or  upon  the  general  welfare  is  not  to  the  purposes  of 
the  quest,  and  therefore  is  not  relevant  to  the  meaning  of  the 
term ;  that  in  neither  the  materiality  of  the  source  of  the 
service  to  the  individual  nor  in  the  materiality  of  the  result 


SIGNIFICANCE  OF  COST  OF  PRODUCTION      119 

is  the  test  of  capital  or  of  productivity  to  be  found ;  that  any 
possession  that  brings  gain  to  its  possessor  is  capital,  and  that 
any  result  that  commands  a  price  is  product ;  in  short,  that 
productivity  in  the  competitive  order  means  merely  service- 
ability for  private  income  or  private  gain  —  means  proceeds. 


CHAPTER  IX 

WHAT    IS    PRODUCTION?    WHAT    THINGS    ARE    PRODUCTIVE? 

The  variety  of  productive  activities.  —  We  have  already 
noted  the  wide  variety  and  complexity  in  the  desires  of 
men  and  in  the  labor  and  equipment  employed  in  satisfying 
these  desires.  Some  labor  is  applied  to  obtaining  wheat 
or  meat  or  vegetables  for  human  food,  —  other  labor  in  the 
different  departments  of  the  clothing  industry,  still  other 
in  the  making  of  textiles  for  tents  and  awnings,  other  again 
in  constructing  those  larger  suits  of  clothing  which  we  call 
houses.  And  there  are  tables,  chairs,  pictures,  books,  wagons, 
cars,  locomotives,  automobiles  —  a  countless  variety  of  com- 
modities upon  the  market  in  the  form  of  tangible  material 
products.  And  there  are  immaterial  products ;  if  foods 
and  medicines  to  make  us  strong  and  well  are  the  result  of 
productive  enterprise,  what  shall  be  said  of  the  wise  advisings 
by  which  the  physician  directs  us  toward  the  same  goal  of 
health.  If  his  pills  are  products  worth  paying  for,  his  advice 
is  still  better  worth  —  a  more  valuable  product.  To 
regard  the  maker  of  a  violin  as  productive  occasions  no  diffi- 
culty ;  as  little  should  any  one  hesitate  in  pronouncing  pro- 
ductive the  employee  who  plays  the  violin.  If  the  manu- 
facturer of  a  book  is  productive,  so  also  is  the  writer  of  it. 
And  if  the  writing  of  an  essay  is  productive,  so  also  is  the 
effort  of  the  lecturer  who  does  no  writing.  And  if  a  painting 
is  a  product,  so  also  is  the  vitascope  picture  upon  the  canvas 
or  the  living  pictures  which  actors  present  upon  the  stage. 
And  by  the  same  test  teachers  and  preachers  and  singers 
are  productive.  Likewise  the  railroad  that  transports  the 
goods,  or  the  retail  merchant  around  the  corner  who  makes 
them  accessible,  is  as  much  a  producer  as  the  farmer  that 
grew  them. 

120 


WHAT  IS  PRODUCTION f  121 

The  nature  of  competitive  production.  —  Economic  pro- 
duction is  the  bringing  about  of  changes  appropriate  to  com- 
mand a  price ;  it  is  the  response  to  price-paying  disposition. 
Anything  that  meets  this  test  is  economic  production.  And 
nothing  else  is. 

But  no  economic  activity  is  able  to  command  a  price  merely 
by  the  fact  that  the  result  is  useful.  Not  only  must  the  re- 
sult have  utility,  it  must  also  be  scarce,  else,  not  having  to 
pay  for  it  in  order  to  get  it,  no  one  will  pay  for  it ;  it  will  com- 
mand no  price. 

Thus  the  test  of  productivity  is  not  in  the  materiality  of  the 
product.  To  produce  is  not  to  create.  The  production  of  borax 
requires  merely  a  20-mule  team  to  change  the  location  of  the  thing 
from  a  place  where,  satisfying  no  need,  nobody  will  pay  for  it,  to 
a  place  where  there  is  a  disposition  to  pay.  So,  to  produce  coal 
is  in  part  to  change  its  form,  and  more  to  change  its  place.  The 
production  of  ice  is  mostly  the  keeping  of  it  from  winter  to  summer, 
a  time  utility.  A  statue  is  merely  form  utility.  In  truth,  so  far 
as  we  know,  neither  matter  nor  force  can  be  created  or  destroyed ; 
the  law  of  the  conservation  of  energy  appears  to  be  of  universal 
validity.  Decay,  combustion,  and  digestion  are  the  mere  breaking 
apart  of  matter,  the  taking  on  of  a  less  complex  organization,  the 
undergoing  of  new  distributions.  Mechanical  energy  may  be 
changed  to  heat,  heat  to  light  or  to  electricity,  heat  or  electricity 
back  to  mechanical  energy,  but  the  equivalence  is  constant  if  all 
wastes  and  leaks  are  allowed  for. 

And  there  is  really  a  more  serious  difficulty  for  those  economists 
who  regard  the  materiality  or  tangibility  of  the  results  achieved 
as  the  test  of  productivity.  It  was  pointed  out  in  our  analysis 
of  utility  that  the  so-called  qualities  inhere  not  in  the  objective 
fact  but  only  in  the  relation  of  that  objective  fact  to  the  human 
being;  that  what  we  see  or  feel  or  taste  or  hear  gives  no  trust- 
worthy account  as  to  what  the  outside  world  really  and  ultimately 
is  or  is  not,  but  only  as  to  how  it  affects  us.  It  follows  that  we  have 
as  little  warrant  as  necessity  for  asserting  the  materiality  of  any 
part  of  the  outside  world,  in  such  a  sense  as  to  distinguish  it  from 
the  world  of  force  or  energy.  In  truth,  all  that  we  know  of  the 
external  fact  that  we  call  matter,  we  know  solely  in  terms  of  the 
forces  with  which  it  affects  us  —  in  resisting  the  pressure  of  touch, 
deflecting  rays  of  light  to  us,  drum-beating  upon  our  apparatus 
for  hearing.     Extension  is  only  resistance  over  a  given  area,  density 


122  THE  ECONOMICS  OF  ENTERPRISE 

is  only  degree  of  resistance,  weight  only  pressure  downwards, 
taste  only  a  chemical  reaction.  For  what  wc  know  —  and  as  later 
science  inclines  to  infer  —  matter  may  be  notliing  more  than 
the  manifestation  of  force  —  the  ultimate  elements  of  the  atom 
mere  points  of  electrical  energy.  At  all  events,  we  know  matter 
only  as  manifestation  of  some  form  or  forms  of  energy.  The 
issue  does  not  fundamentally  signify  for  our  economic  reasonings. 

It  follows  that  to  measure  wealth  in  any  degree  in  terms  of  ma- 
terial existence  is  misleading.  There  is  no  more  matter  in  the  world 
at  present  than  there  was  a  thousand  years  ago ;  but  matter  has 
been  modified  so  as  better  to  answer  human  needs.  The  house 
which  was  mere  clay  or  stone,  the  cloth  the  material  for  which  was 
not  grown  but  was  in  the  earth  or  the  air,  are  now  wealth  to  man- 
kind. Work  produces  no  new  matter,  no  new  forces;  it  does 
change  the  applicability  of  matter  and  force  to  human  uses. 
The  iron  in  the  earth  mined,  melted,  freed  from  impurities,  ham- 
mered and  fashioned,  forms  a  pocket  knife.  Nothing  has  been 
added  to  the  matter  of  the  earth ;  something  has  been  added  to  the 
wealth  of  men. 

Thus,  as  human  needs,  desires,  and  knowledge  expand,  there 
is,  by  that  very  fact,  room  for  an  increase  in  wealth.  "  Of  the 
one  hundred  and  forty  thousand  species  of  vegetable  life  we  find 
only  three  hundred  of  sufficient  value  to  cultivate ;  and  of  the 
thousands  of  species  in  the  animal  kingdom  we  make  use  of  but 
about  two  hundred."     (De  CandoUe.) 

Goods  increase,  therefore,  along  two  lines  :  (1)  by  changes 
which  man  impresses  upon  the  outside  world  in  making 
it  more  fit  for  his  uses ;  (2)  by  changes  in  man  himself 
—  in  strength,  in  knowledge,  in  desires  —  by  which  he  be- 
comes better  able  to  make  use  of  the  outside  world.  Pianos 
could  not  be  wealth  in  a  society  lacking  musical  tastes,  or 
books  wealth  to  savages.  That  a  mineral  becomes  wealth 
presupposes  a  human  use  to  which  it  may  be  put,  an  ability 
to  mine  the  mineral,  and  a  knowledge  to  adapt  it  to  use. 
It  is  this  capacity  for  service,  this  attribute  of  utility,  which 
marks  all  objects  of  desire  and  brings  them  within  the  broad 
classification  called  goods. 

Services  are  products.  —  There  are,  however,  goods  which 
are  commonly  termed  not  wealth  but  services.  A  book, 
or  a  sheet  of  music,  or  a  piano,  is  wealth.  All  afford  pleasure 
or  advantage.     They  may  be  preserved,  handled,  possessed. 


WHAT  IS  PRODUCTION?  123 

That  is  to  say,  they  are  fixed  and  embodied  in  matter. 
But  we  are  equally  and  as  truly  served  by  the  advice  of  the 
phj^sician,  by  the  efforts  of  the  singer  or  the  actor,  by  ora- 
tors, preachers,  and  teachers.  These  goods,  which  are 
termed  by  the  economists  services,  are  very  important  facts 
in  life,  and  furnish  the  occasion  for  a  large  share  of  our  ex- 
penditures. On  the  street  car  or  the  railroad  we  pay  for 
being  carried.  The  policeman,  the  judge,  and  the  lawyer 
supply  us,  in  security,  direction,  and  advice,  with  things  we 
acutely  need.  From  household  servants  we  purchase  at- 
tention, care,  and  attendance.  In  truth,  it  is  sometimes 
hard  to  draw  the  line  between  services  and  commodities. 
We  eat  the  broiling  of  our  steak  as  truly  as  our  steak.  Thus 
the  performance  of  a  service  must  be  accounted  an  act  of 
production,  since  it  is  the  creation  of  valuable  utility.  Ulti- 
mately, indeed,  all  commodities  are  such  by  the  services  which 
they  finally  render  —  their  psychic  effects. 

For  the  purpose  of  the  inquiry  as  to  what  sorts  of  labor  con- 
tribute to  increase  the  aggregate  accumulated  wealth  of  society, 
an  inquiry  with  which  the  earlier  economists  were  much  concerned, 
there  is  importance  attaching  to  the  classical  distinction  between 
so-called  productive  and  so-called  unproductive  labor.  Services 
are  in  their  very  nature  evanescent ;  they  will  not  store ;  in  coming 
to  be  they  cease  to  be ;  they  do  not  add  to  the  stock.  On  the  other 
hand,  that  which  is  material  is  in  a  general  way  enduring.  Thus 
only  material  things  appear  to  add  to  wealth.  But  the  line  of 
distinction  which  was  really  sought  was  not  that  between  the 
productive  and  the  non-productive,  or  between  the  material  and 
the  immaterial,  or  between  the  tangible  and  the  intangible,  but 
between  the  accumulatable  and  the  non-accumulatable.  The 
line,  however,  between  the  material  and  the  immaterial  applies 
not  badly  for  the  purposes  of  the  desired  distinction.  Some  forms 
of  material  product  are,  it  is  true,  very  temporary  in  their  existence ; 
e.g.  ice  cream;  but,  nevertheless,  the  distinction  as  made  draws 
the  line  fairly  accurately  between  the  things  that  add  to  accumu- 
latable wealth  and  those  that  do  not  add.  The  terms  productive 
and  unproductive  were,  however,  not  well  adapted  to  the  purposes 
of  the  distinction.  Nor  does  the  distinction  mean  much  from  the 
point  of  view  of  the  modern  competitive  analysis  and  of  its  theo- 
retical needs. 


124  THE  ECONOMICS  OF  ENTERPRISE 

The  producer  is  not  product.  —  Productive,  then,  we  call 
whatever  labor  achieves  a  gain  for  the  laborer  whether  its 
results  be  a  valuable  commodity  or  a  valuable  service.  But 
here  another  difficulty  presents  itself :  doubtless  food  or 
medicine  is  wealth ;  but  is  the  derived  health  or  strength 
wealth?  Accurately  speaking,  can  one's  face  be  one's  for- 
tune? Is  one  who  is  studying  a  trade  or  a  profession  yet 
a  producer?  If  health  is  wealth,  does  it  matter  whether 
one  is  born  with  it  or  had  to  acquire  it?  Are  one's  muscles 
a  part  of  his  wealth?  One's  digestive  apparatus?  The 
distinction  must  be  again  drawn  between  those  things  in 
the  outside  world  which  are  gainful  to  man  and  those 
things  which,  in  the  last  analysis,  are  a  part  of  man  himself. 
Bread,  for  example,  is  clearly  enough  an  outside  good,  an 
external  thing  commanding  a  price.  How  after  it  is  eaten? 
We  say  that  it  has  been  consumed.  It  no  longer  exists  as 
bread.  Its  services  have  been  rendered  in  maintenance  of 
life  or  increase  of  strength.  But  how  shall  we  regard  this 
result,  this  strength?  In  the  primary  division  of  economic 
facts  into  man  and  envirormient,  does  bread  fall  into  one 
classification  and  strength  into  another?  The  thing  was 
bread  ;  it  is  now  life  or  strength.  Is  it  now  something  pos- 
sessed by  man,  or  is  it  a  part  of  man  himself?  Is  it  subject 
or  object,  possessor  or  possession,  man  or  environment? 

Man  is  the  beginning  and  the  end  of  productive  effort. 
The  creation  of  utility  is  purposed  by  him  for  his  consump- 
tion. He  puts  forth  effort  that  he  may  enjoy  its  rewards. 
The  economic  cycle  begins  and  ends  in  him.  He  works  that 
he  may  live.  He  is  the  producer  and  not  the  thing  produced. 
The  more  strength  the  better  producer  —  later  the  larger 
product ;  but  the  strength  is  not  product.  So  the  mixtures 
prepared  by  the  chemist,  and  the  doctor's  compoundings 
of  medicinal  gums,  fall  within  the  class  goods,  while  my 
good  health  to  resist  contagion  and  your  good  sense  to  avoid 
it  are  ranked  as  human  attributes. 

Only  objective  facts  can  be  wealth  or  product.  —  But  while 
the  knowledge  which  avoids  disease  is  a  human  attribute 
and  is  not  wealth,  the  outside  fact  from  which  this  knowl- 
edge is  obtained,  the  book,  or  the  advice  of  the  physician, 


WHAT  IS  PRODUCTION? 


125 


is  either  wealth  or  service.  The  mental  power  of  the  physi- 
cian, his  knowledge,  however,  is  not  wealth ;  it  is  the  source 
of  his  ability  to  do  a  useful  thing,  to  speak  a  word  or  write  a 
prescription  which  shall  be  of  advantage  to  another  human 
being.  This  knowledge  is  a  part  of  the  physician's  equip- 
ment for  the  production  of  utility.  When  this  equipment 
shall  come  to  service  the  result  will  be  a  good.  As  equipment, 
however,  it  is  not  utility  or  good,  but  physician. 

The  terminology  and  the  distinctions  so  far  given  are  con- 
cisely summarized  in  the  following : 


Facts 


Internal 

Useless  to 
possessor 

.  External 

Useful  to 

Plenty 

possessor 

(valueless) 

(goods) 

Scarce 
(valuable) 

Services 
Wealth 
(property) 


But  one  or  two  ambiguities  should  be  noted.  The  term 
services  is  used  to  indicate  either  the  valuable  result  of  the 
labor  or  the  labor  itself.  But  obviously,  by  this  test  of  re- 
sults, all  material  goods  finally  render  services.  The  term 
wealth,  on  the  other  hand,  is  sometimes  said  to  apply  only 
to  material  things  of  value.  A  franchise,  however,  or  a 
patent  right  is  wealth  by  the  fact  that  it  is  an  objective 
thing,  a  possession ;  wealth,  therefore,  means  in  essence 
valuable  possessions,  whether  material  or  immaterial. 

Materiality  unimportant.  —  But  to  return  to  the  pro- 
ductivity of  labor :  we  have  seen  that  all  work  in  the  pro- 
duction of  valuable  goods,  material  or  immaterial,  wealth 
or  services,  is  productive  so  long  as  the  result  is  something 
of  value  objective  to  the  workman.  Thus  the  bookkeeper 
or  designer  or  advising  chemist  in  the  factory  must  be  de- 
clared productive ;  or  the  salesman  in  the  warehouse ;  or 
the  traveling  salesman  upon  the  road  ;  or  the  writer  of  adver- 
tisements. Each  has  a  separate  share,  a  share  worth  pay- 
ing for,  in  getting  saleable  commodities  upon  the  market. 
All  are  cogs  in  the  machine,  steps  in  the  process  contributory 


126  THE  ECONOMICS  OF  ENTERPRISE 

to  the  p;roat  end  in  view,  —  namely,  the  production  of  some- 
thing that  some  one  is  willing  to  pay  for.  If  we  are  to  regard 
as  productive  the  industry  which  furnishes  the  cattle,  so 
must  we  also  the  industry  that  cooks  the  beef.  If  to  grow 
wheat  or  to  grind  it  is  productive,  so  also  is  the  baking.  If 
the  stock  car  is  productive  in  transporting  beeves  or  grain 
over  wide  intervals  of  space,  so  also  must  be  the  waiter  who 
brings  the  food  from  the  kitchen  or  passes  it  at  the  table. 
If  we  pay  to  have  commodities  transported,  so  we  pay  to 
have  ourselves  transported.  The  rule  which  holds  for  the 
tailor  who  cuts  the  goods  or  for  the  laborer  that  pieces 
the  goods  together,  is  valid  also  to  declare  productive 
the  presser  who  shapes  or  the  valet  who  brushes.  We 
wear  the  making  or  the  brushing  of  the  coat  as  truly  as 
we  wear  the  cloth  of  it.  She  who  wields  the  broom  in  the 
house  is  no  less  productive  than  he  who  fashions  the 
broom  in  the  factory.  One  colorist  with  his  brush 
pictures  his  fancies  upon  canvas ;  another  color-worker 
by  the  magic  of  his  words  paints  pictures  upon  the  tablets 
of  the  mind ;  the  fact  that  we  pay  for  either  shows  either 
to  be  value  rendering. 

Ethical  tests  irrelevant.  —  Nor,  again,  does  it  at  all  matter 
to  the  purpose  what  may  be  the  artistic  merit  of  the  service 
or  its  moral  quality  —  whether  the  advice  be  wholesome, 
the  acting  skillful,  the  music  classic,  the  play  clean,  the 
teaching  scholarly,  the  lecture  conservative,  the  preaching 
godly.  Each  of  these  questions  is  irrelevant  except  in  so 
far  as  it  may  have  some  bearing  upon  the  price  that  will  be 
bid.  Pefuna,  Hop  Bitters,  obscene  literature,  indecent 
paintings,  picture  hats  and  corsets  are  wealth,  irrespective 
of  any  ethioal  or  conventional  test  to  which  they  may  or 
may  not  conform.  Being  marketable,  price-bearing,  they 
are  wealth.  So  likewise  of  services ;  in  no  case  is  economic 
productivity  a  matter  of  piety  or  of  merit  or  of  social  deserv- 
ing. Were  it  otherwise,  it  would  be  necessary  to  change 
one's  political  economy  according  as  one  were  talking  to  a 
prohibitionist  or  to  a  German.  What  is  the  economist, 
that  he  should  go  behind  the  market  fact  and  set  up  a  social 
philosophy    of   ultimate    appraisals;     "For   who   knoweth 


WHAT  IS  PRODUCTION?  127 

what  is  good  for  a  man  in  this  life,  all  the  days  of  his  vain 
life  that  he  spendeth  as  a  shadow?  "  If  the  generous  fees 
that  the  lawyer  receives  for  pleading  an  unjust  cause  are 
earned,  so  also  is  the  daily  intake  of  the  beggar  at  the  corner, 
or  of  the  holdup  man  in  the  alley.  Always  and  everywhere 
in  the  competitive  regime  the  test  of  competitive  production 
is  competitive  gain  —  proceeds.  Whatever  effort  serves 
the  acquisitive  end  is  labor.  Profits  are  merely  one  form  of 
individual  pecuniary  return  for  personal  pecuniary  activity. 
Speculators,  lobbyists,  quacks,  painters,  abortionists,  and 
prostitutes  are  producers  :  that  they  are  paid  is  the  adequate 
and  ultimate  proof.  This  is  surely  not  to  deny  the  fact  of 
parasitism  in  society.  But  parasitism  is  not  a  competitive 
category  but  an  ethical  appraisal.  In  the  economic  sense, 
productivity  in  a  competitive  society  —  the  proceeds  con- 
cept —  is  a  concept  unrelated  to  ethical  criteria  and  uncon- 
cerned with  any  social  accountancy.  Grass-cutting  or 
sheep-shearing  on  the  farm  or  the  range,  slave-driving  on 
the  plantation,  slave-catching  in  the  jungle,  sweat-shop 
exploitation  by  the  contractor,  white-slave  exploitation  by 
the  procurer,  tress-cutting  from  peasant  heads  by  the  hair 
merchant,  pocket-picking  by  its  professors,  adulteration 
by  the  manufacturing  druggist,  poison-canning  by  the  pack- 
ers, shell-gaming  by  the  gamblers,  privilege-manipulating 
by  the  monopolist  —  are  all  productive  occupations. 
Whether  one,  in  his  catholic  wholeness  shall  include,  like 
Francis  of  Assisi,  the  grass  and  the  flowers  as  among  the 
brotherhood  that  he  may  not  exploit,  or,  with  the  vegetarians 
and  the  Humane  Society,  shall  exclude  from  his  exploitation 
only  the  higher  levels  of  the  brute  creation,  or  shall  extend 
his  operations  to  the  African,  the  Indian,  and  the  Chinese,  or, 
aiming  still  higher,  shall  subject  to  his  purpose  of  gain  his 
fellow-citizen,  his  neighbor,  and  finally,  his  mother,  are 
purely  moral  questions,  interesting  to  the  arts  of  public 
policy  and  of  legislation ;  but  gain  remains  gain  however  it 
be  achieved ;   and  competitive  productivity  includes  it  all. 

So  again  productive  effort  is  often  exerted  in  producing  goods 
for  the  consumption  of  the  producer  himself.     It  is  thus  evident 


12S  THE  ECONOMICS  OF  ENTERPRISE 

th:il  labor  is  not  to  be  doclarcd  i>roductive  or  unproductive  by  the 
test  of  whether  the  product  is  actually  sold,  or  even  by  the  test  of 
whether  the  producer  could  sell  it,  but  rather  by  the  test  of  its 
having  a  price  significance.  Its  result  must  be  not  merely  a  utility 
but  a  valuable  utility  —  something  that  the  possessor  would  pay 
for  if  he  had  to  —  something  that,  produced  by  him  or  by  another 
for  him,  will  protect  him  from  some  outlay  or  sacrifice  or  burden. 

Put  in  terms  of  our  earlier  analysis  the  test  of  productivity  is 
satisfied  if  either  a  reservation  price  or  a  demand  price  attaches 
to  the  good  produced. 

Reservation  prices.  — ■  And  here  we  may  stop  to  note  another 
theoretical  advantage  in  stressing  the  demand  aspect  of  the  reser- 
vation price ;  we  are  able  to  regard  all  goods  produced  in  society 
as  goods  actually  upon  the  market.  Total  supply  and  total  product 
become  interchangeable  terms.  It  often  clarifies  the  argument 
to  regard  all  employers  of  labor,  middlemen  or  other,  and  all  self- 
employed  laborers,  whether  or  no  they  sell  their  product,  as  entre- 
preneurs. In  any  case  there  is  a  price  upon  the  product  at  which 
the  owner  would  be  ■willing  to  sell.  If  his  price  be  above  what  he 
can  sell  it  for,  he  retains  the  commodity  under  his  own  demand. 

What  products  affect  the  demand  for  labor.  —  It  is  sufficient 
for  the  present  to  note  that  all  this  demand  for  labor  —  the  entre- 
preneur demand,  the  demand  of  the  emplojang  consumer,  and  even, 
also,  the  worker's  demand  for  his  own  work  —  goes  to  make  up 
the  total  price  offer  for  labor.  For  such  labor  as  the  entrepreneur 
employs  he  pays  wages  at  the  rates  which  the  market  imposes ; 
and  these  wages,  therefore,  stand  as  cost  items  in  the  computing 
of  his  total  cost  of  production. 

The  role  of  wealth  in  affording  income.  —  But  there  are 
obviously  other  productive  facts  than  labor.  There  are, 
as  we  have  seen,  two  ultimate  sources  of  income,  human 
activity  and  human  possessions.  To  say  that  the  individual 
derives  his  income  from  his  labor  or  from  his  property  does 
not,  it  is  true,  take  due  account  of  gifts  and  of  gratuitous 
services  of  one  sort  or  another  —  of  which  more  later  —  but 
is,  nevertheless,  accurate  in  the  main.  We  have  now  to 
examine  the  property  sources  of  income. 

If  working  with  machinery  gave  no  larger  product  than 
the  labor  alone,  it  would  not  be  worth  w^hile  to  buy  or  hire 
or  construct  the  machinery.     If  the  quality  of  the  land  had 


WHAT  IS  PRODUCTION?  129 

no  effect  upon  the  amount  of  crop  that  could  be  harvested, 
agricultural  land  could  not  command  a  rent  or  sell  for  a 
price.  Instruments  of  production  are  productive  in  the 
same  sense  and  by  the  same  tests  as  apply  to  labor ;  namely, 
according  to  the  proceeds  returned  in  the  price  of  the  prod- 
uct. And  as  before  with  the  labor,  so  now  with  the  instru- 
ments :  it  does  not  matter  that  the  owner  of  the  instruments 
may  consume  instead  of  selling  the  product.  The  instru- 
ments still  have  price  significance  to  him,  earning  him  in- 
come of  valuable  goods  or  saving  him  an  outlay  of  cash. 

Clearly  enough,  then,  the  notion  of  productivity  applies 
to  all  instruments  of  production,  and  to  all  equipment 
goods,  as  the  command  of  rent  or  of  price  sufficiently  proves. 
In  the  competitive  sense,  productivity  really  finds  its  sole 
test  in  price.  But  the  class  of  possessions  that  return  in- 
come includes  a  wide  variety  of  property.  Precisely  as  to 
help  people  to  keep  healthy  is  a  productive  fact,  a  service, 
so  to  furnish  some  one  a  home  to  live  in,  and  to  keep  warm 
and  strong  in,  is  also  a  service,  although  attached,  it  is  true, 
to  the  possession  of  a  material  good.  There  accrues  not 
merely  a  money  income  to  the  owner  of  the  house  but  also 
an  income  of  service  from  the  house  to  the  tenant.  It  is, 
indeed,  on  account  of  this  service  to  the  tenant  that  the 
tenant  renders  a  money  income  to  the  owner.  The  books 
of  a  circulating  library  command  a  hire  for  the  same  reason 
that  the  lecturer  or  the  teacher  or  the  preacher  receives 
a  wage.  The  rent  of  talking  machines  has  the  same  basis 
as  the  salary  of  its  human  competitor.  The  passenger  coach 
and  the  brakeman  are  each  engaged  in  furnishing  transporta- 
tion. The  Pullman  in  America  is  for  essentially  the  same 
service  as  the  cooley  carrier  in  India.  The  theater  building 
or  the  concert  garden  are  purveyors  of  the  same  sort  of  ser- 
vice as  the  actor  or  the  musician.  The  picture  upon  the 
wall  gives  a  continuous  reproduction  of  the  tableau  vivant. 
In  some  homes  electrical  appliances  displace  the  furnace  or 
the  stove ;  or  one  may  warm  himself  through  the  kneading 
or  the  rubbing  of  the  masseur.  In  truth  all  wealth  is  such 
by  the  fact  of  rendering  scarce  services,  and  all  forms  of 
wealth  receive  their  hire  or  price  by  virtue  of  this  power  of 

E 


130  THE  ECONOMICS  OF  ENTERPRISE 

service.  A  durable  good  is  meivly  the  material  base  of  a 
series  of  services.  Thus  a  money  income  from  property 
may  be  derived  from  lending  houses,  pleasure  boats,  mas- 
querade costumes,  horses,  automobiles,  picture  films,  paint- 
ings. This  money  income  to  the  owner  is  the  reflection  and 
the  proof  of  the  fact  that  the  propertj'^  renders  an  income  of 
valuable  service  to  the  user.  This  use  is  generall}^  paid  for 
according  to  the  time  for  which  the  property  is  lent  out; 
and  this  is  because  the  services  accrue  with  passing  time; 
that  is,  they  arrive  in  a  time  series.  The  time  rent  paid  by 
the  borrower  is  the  expression  of  the  fact  that  Avith  passing 
time  a  product  accrues  from  the  borrowed  thing.  The  rent 
received  by  the  owner  is  in  turn  the  productiveness  of  the 
thing  to  him.  All  durable  goods  illustrate  this  character- 
istic of  rendering  services  with  passing  time.  These  services 
are,  therefore,  the  time  incomes  of  property. 

But  precisely  as  it  was  shown  that  products  need  not  be  salutary 
or  wholesome  as  socially  viewed  in  order  to  be  wealth,  so  the  durable 
goods  that  earn  income  for  their  owners  need  not  be  things  of  which 
the  ethical  sense  of  most  men  would  approve.  As  one  may  collect 
rents  upon  blacking  boxes  lent  to  street  boys  or  from  hurdy-gurdies 
hired  b}^  Italian  street  wanderers,  so  one  may  rent  out  finery  to 
deck  the  vagabondage  of  women,  or  may,  for  hire,  supply  safe- 
cracking appliances  to  men  disposed  to  ply  the  burglar's  trade. 
Burglars'  jimmies  are  wealth  by  the  very  fact  of  the  marketable 
services  that  they  afford,  their  proceeds.  The  rent  expresses  the 
fact  that  the  services  are  marketable.  The  property  earns  income 
to  the  owner :  it  is,  therefore,  productive.  Saloon  appliances,  and 
the  dice  and  the  roulette  table  of  the  gambler,  are  all  productive 
for  the  purposes  of  the  problem,  the  earning  of  an  income.  Pro- 
ductive really  means,  then,  gainful  or  acquisitive :  meaning  only 
this,  but  imphdng  sometliing  dangerously  more,  it  would  be  a 
good  word  to  beware  of. 

Are  thieves  producers  ?  —  But  the  critical  reader  may  well  have 
protested  when,  a  short  time  since,  the  beggar,  the  gambler,  and  the 
thief  were  included  among  "  productive  "  laborers.  The  writers 
of  salacious  books  and  the  printers  of  indecent  pictures  may  readily 
be  regarded  as  productive  after  their  kind,  since  their  goods  find 
willing  buyers.  And  even  the  men  who  delude  the  people  into 
paying  for  adulterated  foods  and  drugs,  or  for  shoddy  clothes  or 


WHAT  IS  PRODUCTION?  131 

trash  remedies,  or  even  for  poisonous  nostrums,  may  be  called 
productive,  since  they  persuade  us  unwisely  to  want  the  things 
and  to  pay  for  them.  Perhaps  even  the  gambler  and  the  beggar 
nmst  be  included.  But  does  the  same  thing  follow  for  the  thief, 
the  burglar,  and  the  holdup  man?  They  neither  give  us  anythhig 
for  our  money  nor  ask  our  consent  to  the  transfer  which  they  bring 
about.  On  this  basis  surely  a  distinction  might  be  drawn.  If, 
however,  the  distinction  be  accepted  as  valid,  it  must  be  on  terms 
of  denying  that  many  commodities  that  sell  and  that  bear  rents  — 
burglars'  jimmies,  for  example  —  are  wealth;  for  if  the  burglar's 
outfit  is  wealth  by  the  service  it  renders  and  by  the  rent  that  it 
commands,  so,  also,  must  the  burglar's  efforts  be  admitted  to  be 
productive  for  him  and  for  his  private  purpose.  They  acliieve 
proceeds.  Private  purposes  are  the  purposes  according  to  which 
competitive  activities  must  be  tested.  It  would  be  a  strange 
classification  which  should  include  as  "  productive "  property 
the  kettle  in  which  Peruna  is  brewed  and  the  coils  in  which  whisky 
is  distilled,  the  roulette  table  of  the  gambler,  the  trade  tatters  of 
the  professional  beggar,  and  the  retorts  of  the  adulterating  druggist, 
but  which  should  yet  at  the  same  time  declare  neither  wealth  nor 
productive  the  jimmy  of  the  burglar,  the  sandbag  of  the  thief,  the 
ship  of  the  slaver,  and  the  brig  of  the  pirate.  All  absorb  capital 
in  purchasing  them. 

Intangible  properties  give  products.  —  Nor  is  the  test  of 
the  productivity  of  property  to  be  found  in  the  materiality 
of  the  thing  that  is  owned.  The  individual  derives  income 
from  personal  notes  as  well  as  from  other  investments.  Prac- 
tically all  of  the  assets  of  a  banking  or  of  a  triist  company 
are  credit  items.  So  patent  rights  are  sources  of  incomes  and 
hence  command  a  price  upon  the  market.  The  toll  bridge  and 
the  toll  pike  are  income  earning  properties  mostly  by  the  legal 
rights  which  they  enjoy:  nor  do  they  take  the  trouble  to 
ask  one's  consent  to  their  exactions.  So  franchises,  and 
good  will,  and  advertising  popularity,  are  important  property 
rights  attainable  by  investment,  justifying  investment  by  their 
return,  and  commanding  a  price  in  the  investment  market. 
Money  and  bank  credits  —  and  the  credits  equally  with  the 
money  —  are  income-earning  properties  to  the  owner. 

Whether  incomes  imply  hiring  or  tenancy.  —  Not  all  of 

these  different  sorts  of  property  is  the  entrepreneur  likely 


132  THE  ECONOMICS  OF  ENTERPRISE 

to  need  to  hire  at  a  time  charge  or  to  buy  outright.  Prob- 
ably the  larger  share  of  income-paying  properties  pay  their 
incomes  to  their  owners  either  directly  in  the  form  of  a  series 
of  services,  or  in  the  form  of  a  hire  received  from  the  borrower 
as  consumer  of  the  service.  But  any  of  these  pieces  of 
property  the  enterpreneur  may  hire  or  buy :  and  the  out- 
lays therefore  rank  then  as  one  more  item  of  cost  within 
his  aggregate  of  costs. 

We  are,  then,  ready  to  sum  up  this  phase  of  our  analysis : 
Valuable  products  are  termed  commodities  or  services  ac- 
cordingly as  they  have  or  have  not  durable  possessions  as  a 
basis.  Commodities  ready  for  consumption  as  well  as  durable 
bases  of  value  are  termed  wealth  or  property  —  wealth  hav- 
ing some  vague  quantitative  reference  to  value,  property 
little  or  none  of  this  reference.  Durable  forms  of  possessions 
receiving  a  valuation  in  terms  of  money,  a  price,  are  called 
capital.  Wealth,  that  is  to  say,  is  a  general  and  passably 
vague  term  for  all  valuable  possessions  or  property,  durable 
or  other,  and  is  distinctly  an  economic  concept :  property  is 
primarily  a  legal  concept,  an  owned  thing :  capital  is  durable 
property  or  wealth  expressed  under  the  price  denominator. 

Rent  distinguished  from  interest.  —  Those  incomes  which 
with  passing  time  accrue  to  the  individual  from  his  posses- 
sions are  called  now  (1)  rent,  and  now  (2)  interest,  accord- 
ingly as  the  income  refers  (1)  to  the  aspect  of  its  source  as 
more  possession  or  (2)  to  the  capital  aspect  of  its  source. 
Thus  rent  to  the  owner  is  the  compensation  expressed  as  so 
much  corn  or  chickens  or  money  paid  as  the  hire  of  a  cer- 
tain item  of  wealth.  Interest  is  this  same  hire  rendered 
into  money  terms  and  expressed  as  hundredths  paid  for  a 
specified  time  upon  the  money  value  of  the  possessed  capital. 
Interest,  in  other  words,  is  compensation  computed  upon 
the  basis  of  a  dollar-time  unit ;  for  example,  so  many  cents 
per  dollar  per  year.  So  we  may  say  that  the  hire  of  an  item 
of  property,  say  a  horse,  is  $10  per  month,  or  that  the  rent 
or  hire  of  a  machine  is  SIO  per  year.  This  manner  of  state- 
ment looks  at  the  case  from  the  point  of  view  of  the  renter, 
the  user.     The  owner,  also,  after  having  deducted  charges 


WHAT  IS  PRODUCTION?  133 

for  care,  supervision,  expense,  depreciation,  and  the  like, 
may  express  the  net  earning  power  of  the  horse  or  of  the 
machine  at  $5  per  year.  This  still  falls  short  of  the  interest 
statement  and  is  merely  rent ;  only  when  the  owner  computes 
these  earnings  as  a  5  per  cent  per  annum  income  on  a  $100 
property  or  upon  $100  of  capital  has  he  carried  the  case  over 
into  the  interest  terminology. 

An  illuminating  parallel  may  be  found  in  the  terminology  of 
transportation.  How  are  the  earnings  of  freights  running?  It 
will  not  do  to  report  in  terms  of  so  much  per  ton  for  the  freight 
moved  ;  this  would  tell  nothing  specific  until  it  were  known  whether 
the  average  haul  were  long  or  short.  And  it  would  mean  even 
less  to  report  that  the  freight  charges  were  so  much  per  mile,  without 
reference  to  how  much  was  carried ;  a  certain  unit  of  weight  or 
bulk  is  needed.  But  when  the  earnings  are  given  as  so  much  per 
ton-mile,  the  case  is  rendered  over  into  a  common  denominator 
precise  for  the  purpose.  The  dollar-time  unit  for  capital  is  pre- 
cisely such  a  composite  unit :  500  for  two  years  earns,  say,  $50 ; 
1000  for  one  year  earns  $50.  Both  manifest  the  same  interest 
rate,  that  is,  the  same  earning  power  per  dollar-time  unit.  With 
money,  obviously,  or  with  purchasing  power  in  terms  of  money, 
only  the  term  interest  is  appropriate,  although  even  here  interest 
is  sometimes  inaccurately  called  the  rent  of  money. 

Are  costs  restricted  to  four  classes?  or  directed  to  the 
public  weal?  — The  entrepreneur  computation  of  costs  in- 
cludes items  other  than  wages  on  labor,  rents  of  instruments, 
interest  on  the  value  fund  invested,  and  the  entrepreneur's 
own  necessary  profits.  It  is  a  dangerous  inaccuracy  to 
restrict  costs  to  these  four  forms  of  charge,  although  it  is 
true  that  these  are  of  leading  importance.  Other  costs,  as, 
for  example,  risk  burdens,  are  to  be  computed;  taxes  are 
often  to  be  included  and  are  of  considerable  significance; 
advertising  expenses  are  also  to  be  added  ;  and  together  with 
all  these,  there  are  a  multitude  of  other  items,  some  of  them 
in  different  degrees  reducible  to  some  one  of  the  four  dif- 
ferent categories,  but  rarely  if  ever  entirely  so  reducible. 
For  example,  deterioration  charges,  or  upkeep  outlays,  or 
subscriptions  to  public  or  quasi-public  or  even  to  private 
purposes  —  subscriptions    made,    nevertheless,    on   grounds 


134  THE  ECONOMICS  OF  ENTERPRISE 

of  business  expediency  —  must  be  included  ;  tickets  to  the 
church  supper  must  be  bought,  contributions  to  the 
Sunday-school  picnic  submitted  to,  copies  of  the  War  Cry 
accepted  at  5  cents  each.  All  things  which,  from  the  entrepre- 
neur point  of  view,  appear  to  be  expedient  expenditure  for 
the  purposes  of  creating  either  a  commodity  or  a  situation  of 
market  value,  are  outlays  of  capital  taking  rank  as  costs 
of  production.  When  the  purchase  of  machinery  is  an  ad- 
visable move  in  business  policy,  capital  goes  into  it,  as  at 
another  time  into  land  or  labor;  when,  in  good  business 
policy,  a  franchise  or  a  patent  must  be  procured,  capital  is, 
in  either  case,  so  directed  as  to  accomplish  the  necessary 
thing.  When,  for  equally  cogent  business  reasons,  legis- 
latures or  city  councils  must  be  bought,  the  necessary  out- 
lays are,  for  business  purposes,  precisely  like  expenditures 
for  machinery  or  for  the  control  of  patented  processes. 
Tramway  franchises  and  sugar-refining  tariffs,  as  privileges 
obtained  in  the  business  process  through  the  expenditure  of 
capital,  disclose  in  the  current  market  prices  of  the  stock  the 
present  worth  of  the  forecasted  gains.  So  the  expenses  of 
stijfling  competition  are  capital  outlays,  invested  as  the 
costs  of  a  monopoly  to  be  obtained ;  so  also  the  tribute  paid 
to  escape  cut-throat  competition  is  a  capital  cost  of  pro- 
duction.^    For  competitive  purposes  product  is  proceeds. 

Summar}^ :  All  utility  is  ultimately  a  desirable  experience. 
But  only  when  both  desirable  and  scarce  can  anything  at- 
tract a  price  —  prompt,  that  is,  the  sacrifice  of  purchasing 
power  either  in  getting  it  or  in  retaining  it.  Economic  in- 
come implies,  therefore,  more  than  mere  utility  received ;  it 
must  be  a  valuable  utility. 

All  things,  situations,  or  facts,  that  command  for  an  indi- 
vidual either  a  money  income  or  an  experience  which  he  would 
pay  money  to  get  or  demand  money  to  forego,  are  productive 
in  the  economic  sense,  irrespective  of  whether  the  sources 
are  material  or  the  incomes  material,  and  irrespective  also  of 
whether  the  results  are  permanent  or  w^holesome  or  com- 
mendable, or  are  consistent,  either  in  the  getting  or  the  using, 
with  the  welfare  of  others  or  with  the  general  welfare. 

^  Cf.  Veblen,  "Modern  Business  Capital,"  The  Theory  of  Busi- 
ness Enterprise,  Chap.  VI. 


WHAT  IS  PRODUCTION?  135 

Productivity  must,  in  fact,  be  interpreted  purely  as  a  com- 
petitive category  in  the  price  regime.  As  competitive,  the 
point  of  view  from  which  to  regard  it  must  be  the  individual 
point  of  view,  with  private  gain  the  sole  and  ultimate  test, 
and  with  price  as  the  standard.  All  labor,  therefore,  that 
commands  a  price,  though  it  be  the  poisoning  of  a  neighbor's 
cow  or  the  shooting  of  an  upright  judge,  all  durable  goods 
commanding  a  rent  or  affording  a  valuable  service  —  lands, 
machines,  burglars'  jimmies,  houses,  pianos,  freight  cars, 
passenger  cars,  pleasure  boats  —  all  patents,  privileges, 
claims,  franchises,  monopolies,  tax-farming  contracts,  that 
bring  an  income  —  all  advertising,  lying,.,  earning,  finding, 
begging,  picking,  or  stealing,  that  achieve  a  reward  in  price, 
or  a  return  which  is  worth  a  price  —  are  productive  by  the 
supreme  and  ultimate  test  of  private  gain.  The  meaning 
of  product  is  proceeds. 

The  chapter  also  suggests  —  what  later  chapters  will 
further  elaborate  —  that  all  investment  in  enterprise  for  gain 
is  productive  investment  and  therefore  capital.  Rent  and 
interest  are  equally  incomes  from  capital,  rented  properties 
and  rental  incomes  becoming  respectively  capital  and  inter- 
est, as  soon  as  the  property  receives  a  price  statement  and  the 
income  gets  expression  in  terms  of  a  percentage  upon  the 
price  of  its  basis.  Interest  is  merely  income  reduced  to  a 
dollar-time  unit.  Capital  is  a  durable  possession  expressed  in 
terms  of  price  —  the  basis  of  an  income  accruing  with  lapse 
of  time.  In  other  words,  all  durable  goods  yielding  an  in- 
come susceptible  of  a  price  expression  are  capital  by  virtue  of 
that  income. 

The  following  chapter,  somewhat  restricting  the  scope  of 
the  discussion,  will  examine  the  relations  of  the  proceeds  of 
the  labor  and  instruments  employed  in  a  joint  productive 
process  to  the  compensations  received  by  such  labor  and  such 
instruments.  That  is  to  say,  the  chapter  will  examine  the 
principles  and  the  process  according  to  which  the  joint  pro- 
ceeds of  several  cooperating  factors  in  production  are  divided 
—  are  distributed  —  among  those  factors.  It  will  show  that 
distribution,  as  so  restricted,  is  merely  one  aspect  of  com- 
petitive production ;  that  the  price  outlays  in  the  entrepre- 
neur's cost  of  production  are  merely  the  entrepreneur  method 
of  distributing  among  the  cooperating  factors  their  respective 
shares  out  of  the  proceeds  which  they  have  contributed  to 


136  THE  ECONOMICS  OF  ENTERPRISE 

produce  ;  that  the  process  is  exclusively  a  price  process  and 
all  the  terms  in  it  })rice  terms  —  the  joint  proceeds  price  pro- 
ceeds, the  shares  price  shares ;  that  as  the  product  is  the 
price  remuneration  to  the  entrepreneur  for  his  costs,  —  is 
his  reward,  —  so  the  costs  are  the  price  remunerations  to  the 
employed  factors  for  their  service  to  the  entrepreneur  in  his 
undertaking ;  that  not  only  are  the  costs  in  the  productive 
process  price  items,  and  the  distributive  shares  in  the  dis- 
tributive process  price  items,  but  that  the  productive  process 
and  the  distributive  process  are  the  same  process,  and  the 
cost  items  and  the  distributive  items  the  same  items.  It  will 
then  be  manifest  that  each  distributed  cost  is  merely  the 
market  price  of  a  productive  efficiency;  and  that  just  as  the 
market  price  of  a  consumption  good  neither  expresses  its 
utility  nor  measures  it,  and  is  neither  determined  by  it  nor 
measured  by  it,  so  the  market  price  of  each  productive 
efficienc}^  cannot  express  the  quantum  of  that  efficiency,  is 
not  equal  to  it,  is  not  determined  by  it,  does  not  measure  it, 
and  is  not  measured  by  it.  And  finally,  with  reference  to 
productive  efficiency,  regarded  as  a  specific  or  definite 
quality  or  quantity  or  attribute  or  power,  it  will  be  shown 
that  there  is  no  such  thing. 


CHAPTER  X 

THE    DISTRIBUTIVE   PROCESS  '.   APPORTIONMENT    OF   PROCEEDS 

The  productivity  theory.  —  The  problem  of  distribu- 
tion is  the  problem  of  explaining  how  the  aggregate  income 
of  consumable  goods  in  society  is  subdivided  into  the  vari- 
ous individual  incomes.  With  a  given  total  of  products 
to  be  consumed,  how  are  the  shares  apportioned?  What 
forces  determine  the  size  of  each  share,  and  the  sizes  of  the 
shares  relatively  to  one  another,  and  what  is  the  process 
of  the  determination?  Why  and  how  does  each  individual 
get  what  he  gets?  If  it  is  by  the  degree  of  his  deserving, 
how  much  does  he  deserve?  What  is  known  as  the  pro- 
ductivity theory  of  distribution  attempts  to  show  that, 
under  perfect  competition,  each  individual  will  receive  out 
of  the  aggregate  social  income  precisely  what  he  has  con- 
tributed to  this  aggregate  income,  his  share  being  thus  — 
it  is  urged  —  precisely  commensurate  with  his  deserving : 
what  he  gets  he  deserves,  and  what  he  deserves  he  gets. 
How  far  the  productivity  theory,  so  interpreted,  is  tenable, 
whether  accurately  and  precisely,  or  merely  vaguely  and  gen- 
erally, and  how  far  the  theory,  if  established,  must  involve 
an  ethical  approval  of  the  processes  and  results  of  the  com- 
petitive system,  it  will  be  the  task  of  the  present  chapter  to 
consider. 

Aggregate  of  incomes  equals  aggregate  of  products.  — 
So  much  as  this,  at  least,  must  be  obvious :  What  the  mem- 
bers of  society  in  the  aggregate  have  to  consume  depends 
upon  the  total  of  the  goods  that  are  produced  in  society. 
Every  dividend  conditions  its  quotient ;  the  parts  make  up 
the  whole.  With  a  given  quantum  to  divide  —  to  distrib- 
ute —  if  some  get  more,  others  get  less.  Thus  the  problem  of 
distribution  assumes  a  distribuend,  just  as  the  problem  of 

137 


138  THE  ECONOMICS  OF  ENTERPRISE 

division  must  assume  a  dividend.  The  ultimate  distri- 
bution of  wealth  iH^ports  merely  the  different  shares  or  frac- 
tions which  the  different  members  of  society  get  to  consume 
out  of  the  total  product  for  consumption. 

Distribution  is  a  price  process.  —  But  it  must  be  noted 
tliat  the  entire  process  of  distribution  is  a  price  process. 
^Marketable  products  are  price  facts.  The  sums  paid  to 
the  factors  entering  into  production  are  price  sums.  The 
distributive  shares,  apportioned  as  prices  to  the  factors  that 
have  jointly  produced  a  price  product,  are  merely  the  price 
costs  which  the  entrepreneur  has  advanced  in  the  process 
of  bringing  into  existence  a  price  product.  Thus  the  pro- 
cess of  distributing  the  product  is  part  and  parcel  of  the 
process  of  getting  it  produced.  Both  the  distributed  prod- 
uct and  the  distributive  shares  out  of  it  are  price  items. 
The  study  of  entrepreneur  production  is,  therefore,  necessarily 
the  study  of  distribution,  so  far,  at  least,  as  the  distributive 
process  confines  itself  to  the  subdividing  of  a  joint  product 
among  the  factors  cooperating  in  its  production.  It  is, 
in  fact,  solely  the  distributive  aspects  of  the  productive 
process  that  the  present  chapter  will  consider. 

Primary  and  secondary  distributions.^ Not  the  less,  however, 
is  it  to  be  recognized  that  the  distribution  which  accompanies 
production  is  not  the  sole  distributive  process,  or  even  the  sole 
process  worthy  of  study ;  it  is  merely  the  primary  process,  the  pro- 
cess fundamental  to  many  secondary  or  derivative  processes.  Many 
individual  incomes  are  derived  immediately  from  the  public  treasury 
by  pension,  or  grant,  or  sinecure,  or  by  other  public  gift.  But 
the  government  collects  its  revenues  directly  or  indirectly  out  of 
individual  incomes,  as  a  mere  redistribution  of  incomes  already 
once  distributed.  So  the  incomes  of  the  prisoners  in  the  jails 
or  asylums  and  of  the  paupers  and  the  hospital  patients  are  of  the 
same  sort.  In  greater  or  less  degree,  also,  the  incomes  of  most 
women  and  children  and  of  the  recipients  of  private  charity  are  to 
be  ranked  as  distributed  under  secondary  processes.  So  again  of 
inheritances. 

But  the  pressing  problem  with  us  is  the  primary  process 
—  merely,  perhaps,  because  it  is  primary.  How  does  this 
process  take  place,  and  what  are  its  determinants?    What 


THE  DISTRIBUTIVE  PROCESS  139 

fixes  for  any  entrepreneur  the  price-wage  that  he  must  pay 
for  labor,  and  the  price-rents  for  land  and  other  instrumental 
goods,  and  the  price-charge  for  the  use  of  his  own  invested 
funds  ?  And  it  merely  restates  the  question  to  inquire  what 
determines  in  industry  the  wage  earner's  share,  the  land- 
lord's share,  the  instrument  owner's  share,  and  the  fund- 
lender's  share,  and  the  entrepreneur's  own  personal  share 
of  the  joint  price  product.  When  once  we  have  come  to 
understand  the  fixation  of  wages  separately,  and  the  fixation 
of  land  rents  separately,  and  the  fixation  of  interest  rates 
separately,  and  all  of  these  in  relation  to  the  proceeds  de- 
rived from  them,  and  all  of  the  foregoing  in  their  relations 
to  one  another  and  in  their  reactions  upon  one  another,  we 
shall  have  solved  all  that  is  capable  of  solution  in  the  dis- 
tributive problem. 

The  role  of  the  entrepreneur.  —  So  much,  however,  as  this 
is  already  clear ;  the  entire  process  is,  at  every  stage  of  it, 
a  price  process  in  the  competitive  price  mechanism.  The 
finished  products  get  their  prices,  and  the  raw  materials 
get  their  prices,  through  the  typical  and  ordinary  price  pro- 
cesses already  studied  in  earlier  chapters.  So,  the  wages 
of  labor,  the  prices  of  lands  and  the  rents  of  lands,  the  prices 
of  machines  and  the  rents  of  machines,  all  are  fixed  through 
the  demand  and  supply  process  at  the  equating  point  be- 
tween demand  and  supply.  In  the  main,  then,  the  process 
is  captained  by  the  entrepreneur,  is  guided  and  supervised 
by  him,  and  worked  out  through  him.  It  may,  indeed,  be 
said  to  be  entirely  so  worked  out  and  guided,  if  only  the  con- 
cept of  entrepreneurship  be  given  its  proper  extension.  All 
employers  of  labor  or  of  instrumental  goods  for  hire  are  en- 
trepreneurs, no  matter  whether  the  prospective  product  is 
to  be  offered  for  sale  or  not.  If  it  have  no  sale  price,  it  is 
because  it  has  a  reservation  price ;  it  is  still  a  price  product. 
The  client  of  the  lawyer  or  the  patient  of  the  doctor,  the 
master  in  his  hiring  of  his  house  servants  or  his  valet,  the 
employer  of  labor  in  the  raising  of  garden  products  for  the 
home  table,  are  all  bidders  for  factors  of  production  and  are 
entrepreneurs  for  this  —  and  for  every  other  —  purpose  of 
economic  analysis. 


140  THE  ECONOMICS  OF  ENTERPRISE 

How  far  is  the  productivity  theory  valid?  —  We  are  now 
ready  to  undertake  th(>  examination  of  the  productivity 
theory  of  distribution :  Is  it  true  that  the  prices  attaching 
as  costs  to  the  productive  factors,  and  constituting  the  dis- 
tributed shares  of  the  price  product,  arc  received  by  title 
of  contributing  to  the  existence  of  the  derived  price  item? 
We  shall  see  that  so  much  as  this  of  the  productivity  theory 
must  be  both  accepted  and  emphasized.  The  motive  of 
the  entrepreneur  is  his  own  gain.  It  is  with  this  gain  in 
prospect,  prompted,  induced,  and  guided  by  it,  that  he  pays 
for  the  things  that  will  help  him  achieve  it,  and  pays  for 
nothing  else.  Paying  as  little  as  he  must,  competition  will 
ordinarily  compel  him  to  pay  not  far  from  all  that  he  can. 
And  as  the  price  product  is  the  motive,  so  also  it  is  the 
limit,  of  his  disposition  to  pay.  In  essentials,  the  entre- 
preneur is  a  buyer  of  services  and  a  seller  of  their  products. 
The  sale  price  is  the  purpose,  the  justification,  and,  in  this 
sense,  the  cause,  of  the  outlay  prices. 

The  productivity  theory,  therefore,  when  interpreted 
to  mean  no  more  than  this,  is  not  merely  defensible ;  it  is 
axiomatic.  But,  fortunately  or  unfortunately,  this  is  not  all 
of  it.  It  asserts  not  merely  that  the  distributive  shares  are 
the  market  price  of  the  services  —  as  they  obviously  are  — 
but  also  that,  if  competition  be  perfect,  these  distributive 
shares,  these  cost  outlays,  must  be  the  precise  and  accurate 
equivalent  of  the  respective  contributions  of  the  factors  to 
the  bringing  about  of  the  price  product ;  that  what  is  paid 
is  not  only  paid  for  the  services  rendered,  but  is  paid  in  pre- 
cise adjustment  to  the  amount  of  the  service ;  that  the  pro- 
ductivity of  the  factor  is  capable  of  precise  ascertainment  and 
of  precise  comparison  wdth  its  remuneration,  and  that  from 
this  comparison  their  precise  equivalence  is  demonstrable. 
Thus,  both  ethically  and  economically,  the  distributive 
process  in  the  competitive  order  is  approved  and  justified. 
What  the  factors  deserve  they  get,  and  what  they  get  they 
deserve ;  the  results  are  good  ;  the  price  process  is  a  righteous 
process. 

Recalling  once  more  the  terms  in  which  the  distributive 
process  presents  itself — the  process  a  price  and  market  pro- 


THE  DISTRIBUTIVE  PROCESS  141 

cess,  the  thing  to  be  distributed  an  item  of  market  price, 
the  distributive  shares  each  items  of  market  price  —  and 
recalling  also  that  demand  and  supply  are  everywhere  the 
modes  in  which  the  forces  bearing  upon  price  attain  their 
final  expression,  we  return  again  to  an  examination  of  de- 
mand and  supply,  as  related  (1)  to  consumable  products, 
and  (2)  to  the  factors  employed  in  bringing  forth  the  con- 
sumable products. 

The  Prices  of  Consumable  Products 
(A)   The  Demand: 

The  mere  mechanical  details  of  the  fixation  of  price  have 
already  been  sufficiently  examined.  (See  Chap.  V.)  Either 
expressly  or  by  implication  also,  the  demand  for  any  partic- 
ular kind  of  goods  has  been,  for  the  present  purpose,  suffi- 
ciently discussed.  This  demand  is  made  up  of  the  different 
respective  maximum  price  bids  which  the  bidders  are  dis- 
posed to  offer  for  each  respective  item  of  the  commodity 
under  consideration.  When  or  how  the  purchasing  power 
was  obtained,  whether  by  turning  commodities  into  the  me- 
dium of  exchange,  or  by  gift  from  other  individuals  or  from 
the  government,  or  by  inheritance,  or  by  theft,  or  as  wage, 
or  as  bribe,  does  not  at  all  matter  for  the  purpose.  In  any 
case  there  is  a  disposable  purchasing  power  in  the  form  of 
money  or  its  equivalent. 

Fluctuations  in  the  volume  of  this  money  demand  bear- 
ing upon  any  one  consumable  product  are  frequent  and  occur 
from  many  different  causes :  (1)  Changes  slow  or  rapid  in 
the  supply  of  purchasing  media,  (2)  changes  in  desires,  or 
(3)  as  the  more  common  cause,  changes  in  the  prices  of  other 
commodities  competing  for  the  application  of  this  disposable 
purchasing  power.  Lower  price-offers  may,  for  example,  be 
made  for  potatoes,  not  because  of  any  change  in  the  supply 
of  them  or  in  the  hunger  for  them,  but  solely  by  the  fact  that 
bread  has  become  cheaper ;  or,  if  house  rents  rise,  there  may 
be  the  less  to  pay  either  for  potatoes  or  for  bread.  These 
interrelations  are,  indeed,  many  and  complicated.  Dearer 
timber  may  make  iron  or  coal  dearer  and  may  make  building 


142  THE  ECONOMICS  OF  ENTERPRISE 

lots  cheaper.  More  plentiful  su]iplies  of  coarse  wool  may 
raise  the  value  of  the  tine  wool  for  mixing,  the  while  lower- 
ing the  value  of  cotton.  If  horses  are  scarce,  this  may  depress 
the  prices  of  wagons  and  raise  the  prices  of  automobiles. 

(B)    The  Supply  of  Consumable  Products: 

Changes  in  supply  come  about  through  influences  funda- 
mentall}^  parallel  to  those  which  cause  all  changes  of  demand, 
only  that  on  the  supply  side  of  the  case  the  guiding  and  ad- 
justing function  of  the  entrepreneur  is  especially  in  evidence. 
As  on  the  demand  side  the  maximum  price-offer  was  arrived 
at  through  a  comparison  of  the  advantages  of  buying  one 
thing  as  against  another,  so  on  the  supply  side  the  choice 
of  a  line  of  production  is  ultimately  a  comparison  of  the 
advantages  of  producing  one  thing  as  against  doing  some- 
thing else  —  or  doing  nothing. 

Nevertheless  the  analysis  of  supply  is  a  much  more 
complicated  matter  than  that  of  demand.  Not  merely 
have  the  relative  costs  of  different  products  to  be  com- 
puted in  selecting  one's  line  of  production,  but  compar- 
ison must  be  made  of  the  ratios  of  these  to  the  selling 
prices.  Thus  the  relative  advantages  of  a  particular 
occupation  as  against  the  most  attractive  alternative  occu- 
pation may  be  affected  by  a  rise  or  by  a  fall  in  the  price  of 
the  products  of  either  of  the  occupations  under  comparison, 
or  by  either  a  rise  or  a  fall  in  the  costs  of  either  occupation. 
Different  influences  may,  in  truth,  differently  affect  all  the 
different  items  that  together  furnish  the  basis  of  the  aggre- 
gate costs  of  either  commodity.  Lumber  costs  or  fuel  costs, 
for  example,  may  be  rising  for  one  product.  This  rise  in 
lumber  or  fuel  may  be  due  to  the  diminishing  supply  of 
lumber  or  of  coal.  Equally  well,  however,  may  the  cause 
be  found  in  the  pressure  of  the  demand  of  other  industries 
upon  this  lumber  or  upon  this  fuel.  Prices  of  products  in 
other  woodworking  industries  may  be  going  up,  or  a 
diminishing  supply  of  other  materials  may  be  increasing 
the  demand  for  wood  —  and  so  on  in  endless  possibility. 
And  likewise  all  this  multitude  of  combinations  finds  a 


THE  DISTRIBUTIVE  PROCESS  143 

parallel  in  the  process  of  working  out  the  relative  advantages 
of  labor  and  of  entrepreneur  ability  in  different  fields,  and 
thereby  the  varying  significance  of  wages  and  profits  as 
costs. 

The  entrepreneur  again.  —  For  —  let  it  be  once  more  repeated 
—  all  this  bewilderment  of  details  and  all  this  complexity  of  in- 
fluences reach  expression,  in  a  form  appropriate  to  affect  the  supply 
and  thereby  the  market  price,  solely  through  the  entrepreneur 
computation  of  costs.  From  the  entrepreneur  point  of  view  — 
the  demand  being  assumed  —  the  relative  prices  of  goods  depend 
upon  the  relative  supphes  of  goods,  and  these  in  turn  depend  upon 
the  relative  costs  of  goods.  These  relative  costs  are  worked  out 
by  the  entrepreneurs  in  their  effort  to  achieve  their  maximum 
gains. 

Nor  is  this  entrepreneur  method  of  analysis  —  this  cost-of- 
production  manner  of  approach  —  unfaitliful  to  the  facts.  The 
difficulty  is  that,  carried  no  farther  than  the  entrepreneur  is  con- 
cerned to  carry  it,  it  hardly  more  than  brushes  the  surface  of  the 
problem  of  the  prices  of  products  and  of  the  prices  of  the  cost  items 
entering  into  them  —  the  distributive  shares.  It  concerns  itself 
solely  with  the  last  item  in  a  long  series  of  causal  connections.  Its 
seemingly  definitive  data  are  really  not  much  better  than  interroga- 
tion points.  In  truth,  its  service  to  the  economist  is  not  so  much 
in  explaining  prices  as  in  indicating  the  path  along  which  explana- 
tion must  be  sought.  The  ultimate  forces  in  the  problem  are, 
then:  (1)  the  human  desires  for  products,  affording  motive  for 
the  aggregate  social  product  of  goods  to  be  exchanged  against 
one  another,  and  expressing  themselves,  also,  in  any  one  price- 
offer  schedule,  as  the  market  demand  in  terms  of  money  for  that 
particular  line  of  goods;  (2)  the  productive  capacities  of  human 
beings  and  the  instrumental  equipment  at  their  disposal. 

Thus  the  relative  strength  of  the  different  needs  of  different  human 
beings,  working  out  under  the  guise  of  the  different  price-offers, 
and  set  over  against  the  relative  difficulty  of  satisfying  these  needs, 
functions  as  the  ultimate  determinant  in  the  problem.  In  its 
concrete  working  out  in  the  competitive  entrepreneur  process, 
relative  costs  of  production  come  to  determine  relative  prices.  But 
as  included  within  these  relative  costs  reporting  the  price  aggregate 
of  all  the  different  resistances  to  the  production  of  each  particular 
commodity,  full  account  must  be  taken  of  the  opposing  influences 
of  other  competing  demands.  In  truth,  only  with  a  full  recognition 
of  the  opportunity  cost  principle  does  the  doctrine  of  entrepreneur 


144  THE  ECONOMICS  OF  ENTERPRISE 

cost  come  into  working  touch  with  the  actual  facts  of  business. 
Any  attempt  to  cxphiin  ytv'ice  by  an  appeal  to  the  su]iply  side  of  the 
market  price  equation  is  hopeless,  unless  on  terms  of  constant 
reference  to  the  prinoijile  of  opportunity  cost.  For  commodities 
in  general,  and  especially  for  any  particular  commodity,  the  motive 
force  behind  supi^ly  is  demand.  Cost,  indeed,  is  itself  mostly 
traceable  to  resisting  demands.  The  alternative  uses  of  the  factors 
promising  gain  or  tlie  alternative  opportunities  of  the  entrepreneur 
resist  the  particular  i)rodu(;t..  Changes  in  the  cost  of  production  of 
the  particular  commodity  —  which  are  commonly  due  to  changes  in 
the  prices  of  other  commodities  —  modify  the  supjilj^  of  the  particu- 
lar commodity ;  and  changes  in  supply,  resulting  often  solely  from 
changes  in  costs,  in  turn  modify  the  price.  Price  is  a  resultant 
from  the  forces  of  demand  and  supply,  but  the  costs  of  production 
which  lie  behind  supply  to  explain  it  are  themselves  in  large  part 
resultants  from  other  directions  of  demand.  As  ultimate  explana- 
tion, demand  being  taken  for  granted,  the  causal  sequence  in  the 
problem  runs,  therefore,  on  the  supply  side  of  the  investigation, 
from  the  scarcity  of  the  factor  to  the  scarcity  of  its  product,  thence 
to  the  high  price  of  the  product,  thence  to  the  rent  or  hire  of  the 
factor. 

The  prices  of  productive  factors.  —  It  follows  that  not 
even  from  the  entrepreneur  point  of  view  are  the  compensa- 
tions of  the  factors  to  be  regarded  as  the  primary  and  fun- 
damental elements  in  the  fixation  of  price,  but  rather  as 
distributive  shares  received  by  the  different  cooperating  fac- 
tors out  of  the  apportionment  of  their  jointly  produced  price 
product. 

Demand  for  factors  and  demand  for  product.  —  The  salary 
which  the  actor  or  the  singer  receives  is  explained  in  a  gen- 
eral way  by  the  fact  that  there  are  people  who  enjoy  the 
theater  or  the  concert.  Tuition  is  paid  because  teaching 
is  wanted.  AVaiters  and  valets  command  wages  because 
there  are  people  wdio  desire  their  sort  of  services.  So 
carpenters  are  hired  and  paid  because  people  want  houses ; 
textile  machines  because  there  is  a  need  for  textiles ;  wheat, 
grain,  and  bakers  because  there  is  a  need  for  bread.  The 
demand  for  productive  agents  and  instruments  is  due  to  the 
demand  for  their  products. 


THE  DISTRIBUTIVE  PROCESS  145 

Utility  of  product  as  related  to  its  price.  —  But,  as  we  have 
already  seen,  the  utility  of  a  product,  the  degree  in  which  an  indi- 
vidual desires  it,  has  nothing  directly  to  say  as  to  what  he  will 
pay  for  it.  He  may  have  nothing  to  pay  with,  being  much  better 
provided  with  needs  than  with  purchasing  power.  True  it  is  that 
were  the  utility  lacking,  were  there  no  want,  there  would  be  no 
money  demand.  But  it  is  equally  clear  that  there  may  be  utility 
without  the  money  demand.  And  when  there  is  money  to  pay  with, 
the  amount  which  will  be  paid  for  a  given  sort  of  commodity  is 
not  a  question  of  how  much  it  is  wanted  absolutely,  but  only  of 
how  much  it  is  wanted  relatively  to  other  things.  It  is  impos- 
sible to  go  directly  from  utility  to  the  individual's  maximum  price- 
offer,  his  money  demand. 

Nor,  were  it  possible,  would  the  case  for  the  utility  ex- 
planation of  value  be  greatly  helped.  The  price-offers  are 
many,  and  the  market  price  is  one.  Because  the  buyers 
are  different  their  maximum  price-offers  differ.  The  price 
actually  fixed  in  the  market  coincides  with  only  the  mar- 
ginal price-offers,  if,  indeed,  there  are  any  that  are  precisely 
marginal.  To  all  the  other  buyers  there  accrues  a  surplus 
advantage,  expressible  only  as  an  avoided  price  outlay,  or  as 
a  price  differential  between  what  might  have  been  paid  and 
what  was  actually  paid.  Buyers,  then,  do  not  pay  for  any 
commodity  according  either  to  utility  or  to  their  respective 
price-paying  dispositions. 

And  the  same  line  of  reasoning  holds  with  reference  to 
the  hiring  or  the  buying  of  agents  and  instruments  of  pro- 
duction. If  one  employs  some  one  to  play  or  to  sing  for 
him,  it  is  not  necessarily  or  commonly  true  that  the  actual 
payment  coincides  with  the  maximum  possible  payment. 
Most  people  would  pay  more  than  they  do  pay  rather  than 
go  without  the  services  of  the  garbage  man,  the  plumber, 
the  cook,  or  the  washerwoman,  just  as  truly  as  they  would 
pay  more  rather  than  lack  bread  or  shelter  or  clothing  or 
chairs  or  any  one  of  the  many  things  that  are  offered  for 
sale.  In  all  cases  it  is  the  valuable  result  that  motivates 
wages ;  but  it  does  not  precisely  determine  them.  Pro- 
ductivity, therefore,  is  not  accurately  reported  in  the  market 
price. 

L 


146  THE  ECONOMICS  OF  ENTERPRISE 

The  efficiency  —  the  utility  —  of  a  factor  as  related  to 
its  hire.  —  Not  less  clear  is  the  same  principle  in  its  applica- 
tion to  the  entrepreneur  hiring  of  land  or  labor  or  machinery 
in  the  preparation  of  goods  for  the  market.  The  actual 
payment  ordinarily  falls  appreciably  short  of  what  would 
have  been  justified  as  a  maximum  outlay.  In  practically 
all  of  these  relations  of  hiring  or  of  purchase  —  in  all,  indexed, 
but  the  case  accurately  marginal  —  there  is  a  surplus  of 
return  in  price  over  outlay  in  price.  Price  gain  motivates 
the  outlay,  but  does  not  accurately  determine  it.  The  rent 
or  the  price  is  the  market  value  of  the  service  for  gain  rather 
than  the  accurate  equivalent  of  it. 

Parallel  between  production  and  consumption  goods.  — 
The  trutii  is  that  to  interpret  the  wage  or  the  rent  of  any 
factor  of  production  as  the  precise  correlative  or  equivalent 
of  its  gain-rendering  efficiency  is  parallel  to  regarding  the 
market  price  of  a  consumption  good  as  the  precise  correla- 
tive of  its  utility.  No  doubt  the  gain-aiding  efficiency  of 
an  instrumental  good  is  commonly  its  sole  utility.  The 
difficulty  is,  however,  that  this  utility  for  the  processes  of 
gain  is  a  different  utility  for  each  different  entrepreneur. 
Just  as  there  is  no  such  thing  as  one  specific  utility  in  a  con- 
sumption good,  so  there  is  no  such  thing  as  a  specific  efficiency 
for  gain  in  an  acquisition  good.  Importance  for  gain,  like 
utility,  is  a  relation  to  a  particular  individual.  There  is 
neither  gainfulness  nor  utility  at  large  or  socially  or  gener- 
ally. *  Proof  of  this,  if  proof  be  called  for,  is  easily  at  hand 
in  the  ordinary  phenomena  of  the  market.  The  process  by 
which  the  market  rent  or  wage  or  price  of  any  factor  of  pro- 
duction is  fixed  is  not  different  from  that  by  which  a  price 
is  reached  for  any  consumption  good.  The  different  maxi- 
mum offers  of  the  entrepreneurs  for  the  acquisition  good  — 
corresponding  to  the  different  bids  of  the  consuming  public 
for  consumption  goods  —  constitute  the  demand  schedule 
or  curve  :  over  against  this  there  is  the  supply  to  be  marketed. 
The  market  price  so  reached  can  express  neither  a  specific 
utility  in  a  consumption  good  nor  a  specific  power  for  gain  in 
a  production  good. 

And  there  is  a  further  difficulty  :  Precisely  as  the  maximum 


THE  DISTRIBUTIVE  PROCESS  147 

price-offer  of  any  particular  bidder  expresses  not  the  utility 
to  him  of  any  particular  good,  but  only  what  he  can  afford 
to  pay  for  it  as  over  against  some  alternative  application  of 
his  purchasing  power,  so  the  maximum  bid  of  the  entre- 
preneur expresses  not  the  specific  and  independent  efficiency 
for  gain  in  the  factor,  but  only  the  fact  that  this  is  all  the 
entrepreneur  can  afford  to  pay  for  it.  Possibly  the  limit  of  pay- 
ment may  be  found  in  the  advantages  obtainable  from  some 
alternative  fact  —  more  land  instead  of  more  labor,  or  more 
labor  instead  of  more  machines  or  more  land,  or  other  labor  or 
land  or  machinery  as  against  the  particular  item  of  labor  or 
land  or  machinery.  Commonly,  also,  the  particular  item 
is  needed  to  supplement  and  complete  a  particular  equip- 
ment already  in  hand.  The  different  factors  of  production 
must  work  together  to  achieve  their  greatest  effectiveness. 
Land  without  tools,  labor  without  land,  tools  without  land 
or  labor,  would  return  a  meager  product.  It  is  to  this  fact 
of  joint  employment  that  most  of  the  product  is  due.  That 
the  factors  are  brought  together  is  itself  the  proof  of  an  ad- 
vantage attaching  to  the  mere  fact  of  their  conjunction. 
How  then  proceed  to  attribute  to  any  one  of  the  factors  the 
increase  of  the  proceeds  due  to  the  joint  employment?  So 
long  as  either  glove  is  necessary  to  the  worth  of  the  pair, 
how  tell  how  much  either  is  worth?  Which  leg  of  a  three- 
legged  stool  supports  the  stool?  All  that  we  can  say  is 
that  if  the  stool  is  worth  $3,  one  can  afford  to  pay  $3  not  to 
be  deprived  of  any  one  leg  of  it.  So  $2  may  be  offered  to 
get  back  a  lost  glove  out  of  a  $2  pair.  Thus  it  is  easy  enough 
for  the  entrepreneur  to  determine  how  much  he  can  afford 
to  pay  for  an  item  of  productive  goods  or  labor  to  go  with 
his  present  equipment,  but  this  is  not  at  all  to  attribute  to 
the  extra  item  all  the  increase  of  gain  which  will  accrue 
with  the  addition  of  the  extra  item.  One  buys,  say  a 
horse,  to  go  with  a  wagon  which  otherwise  would  be  useless. 
But  this  is  not  to  attribute  to  the  horse  all  of  the  result  from 
both  horse  and  wagon.  The  horse  would  be  equally  useless 
without  the  wagon.  In  the  last  analysis,  the  entrepreneur 
himself  could  not  isolate  and  determine  a  specific  service- 
ability for  gain  relatively  even  to  himself,  but  only  that 


148  THE  ECONOMICS  OF  ENTERPRISE 

which  he  can  afford  to  pay  to  get  the  thing  or  to  refuse  to 
kvvp  the  thing.  And,  as  we  have  seen,  no  one  of  all  these 
different  sums  that  the  different  entrepreneurs  can  respec- 
tively afford  to  pay  or  refuse  has  any  special  title  to  be  re- 
garded as  the  specific  significance  of  the  productive  factor. 

The  argument  against  the  productivity  theory  sums  up 
then  in  this :  That  it  is  beyond  the  wisdom  of  any  entre- 
preneur to  make  accurate  ascription  of  the  efficiency  for 
gain  in  any  one  of  the  business  factors  jointly  engaged  in 
his  gain-seeking  process ;  still  more  is  it  impossible  to  re- 
gard the  remuneration  which  is  accorded  to  any  one  of  several 
factors,  in  its  market  rental  or  price,  as  precisely  expressive 
of  its  gain-aiding  efficiency.  As  much  as  the  entrepreneur 
can  do  is  to  attribute  to  each  factor  a  degree  of  serviceability 
for  his  ends  commensurate  with  what  he  has  to  pay  for  it 
and  to  treat  whatever  is  left  as  due  to  his  own  personal  activ- 
ity in  the  quest  for  gain.  But  this  is  crude  in  theory ;  his 
profit  is  partly  due  to  the  fact  that  he  is  able  to  make  an 
intermediate  good  or  agent  signify  more  to  him  in  gain  than 
he  has  to  pay  for  it  in  wages  or  rent. 

This  reasoning  may  seem  to  put  in  question  the  strict  accuracy 
of  the  definition  of  profit  already  given  —  the  remuneration  of  the 
entrepreneur  for  his  personal  gainful  activity.  But  perhaps  it 
may  be  enough  to  say  that  there  is  in  this  definition  no  impUca- 
tion  that  the  remuneration  is  the  precise  correlative  of  the  power 
for  gain  residing  in  the  individual  and  separate  activity  of  the 
entrepreneur.     The  profit  is  merely  what  he  gets  for  the  activity. 

This  impossibility  of  teUing  precisely  what  a  factor  of  production 
earns  may  seem  to  disclose  a  difficulty  in  telling  precisely  what  a 
factor  costs;  for  often  it  is  true  that  the  cost  in  any  particular 
employment  is  the  alternative  gain  possible  in  another  use. 

But,  e\ddently,  what  the  factor  earns  in  its  actual  employment 
and  what  it  could  be  made  to  earn  in  some  other  employment  — 
its  displacement  cost  —  can  rarely  coincide.  The  justification 
for  the  actual  emplojonent  is  precisely  in  this  fact  that  there  is 
a  difference  in  its  favor.  The  cost  in  any  given  use  is  the  resistance, 
the  debit,  against  that  use.  The  amount  of  gain  from  the  use  is 
another  matter. 


THE  DISTRIBUTIVE  PROCESS  149 

This  debit  may  be  (1)  merely  what  has  to  be  paid  as  hire  for  the 
thing ;  or  (2)  a  sum,  greater  than  the  hire,  that  one  could  get  by 
renting  it  out  or  selling  it ;  or  (3)  the  still  greater  sum  that  one 
could  get  from  it  himself  in  another  employment. 

It  is  under  this  third  possibility  that  the  distributive  analysis 
appears  to  present  a  difficulty  for  the  cost  analysis :  if  it  cannot 
be  told  how  much  the  thing  produces  in  its  actual  use,  how  tell 
how  much  it  would  produce  in  its  potential  use  ?  And  if  this  latter 
is  also  impossible,  how  tell  how  far  the  alternative  use  is  to  function 
as  resistance  to  the  actual  use?  The  cost,  no  doubt,  is  resistance 
to  the  process,  while  distributive  shares  are  remunerations  out  of  it. 
But  in  the  case  in  hand,  the  cost  in  one  use  appears  to  be  the  dis- 
tributive share  possible  in  another  use.  How  ascertain  how  great 
would  be  the  gain  there,  in  order  to  tell  how  great  is  the  resistance 
here? 

But  the  solution  of  the  difficulty  is  in  the  very  principle  under 
present  emphasis :  The  entrepreneur  can  estimate  —  and,  at  the 
margin,  must  estimate  —  what  he  can  afford  to  pay  for  the  thing 
in  the  given  employment  rather  than  go  without  it ;  but  this  is 
not  to  tell  how  much  of  gain  he  expects  specifically  and  independ- 
ently from  the  thing,  but  only  from  it  as  one  thing  present  in  the 
total  complex  —  from  it  in  connection  with  the  other  things  — 
from  it  as  part  of  the  "  togetherness." 

Similarly  the  entrepreneur  is  able  to  tell  —  or  to  estimate  —  how 
much  it  would  signify  to  him  to  have  the  services  of  the  given 
thing  in  some  other  undertaking;  but  here  again,  this  is  not  to 
tell  how  much  is  its  separate  productivity  there,  but  only  what  it 
would  signify  to  have  it  there  to  go  with  whatever  else  is  there. 

It  may  of  course  be  clear  to  the  entrepreneur  that  it  is  not  best 
in  any  case  to  divide  his  complex  —  that  he  must  keep  it  together 
as  a  whole  where  it  now  is,  or  transfer  it  as  a  whole  to  some  other 
business ;  in  that  case  his  cost  analysis  is  not  concerned  with  this 
problem  of  separate  imputation.  Equally  well,  however,  he  may 
have  to  consider  whether  he  shall  not  rent  out  some  part  of  his 
equipment,  retaining  the  rest,  or  take  some  share  of  his  funds  out 
of  his  business  for  other  investment,  or  call  in  some  share  of  his 
other  investments  for  the  purpose  of  enlarging  the  particular 
business  in  hand.  He  may  then  have  to  ascribe  a  separate  cost 
bearing  to  a  separate  factor,  —  may  have  to  determine  what  the 
lack  of  the  thing  somewhere  else  would  mean  to  him.  But  this 
is  not  to  attribute  to  the  thing  a  separate  and  specific  productivity 
somewhere  else. 


150  THE  ECONOMICS  OF  ENTERPRISE 

It  is  to  be  freely  admitted  that  the  cost  doctrine  and  the  cost 
computation  here  presented  may  liave  small  significance  for  many 
of  the  purposes  of  business  accounting.  Everything  depends  on 
what  the  business  man  is  trying  to  get  at  in  his  accounts.  If  his 
accounting  is  for  the  pun^ose  of  telling  him  what  the  gains  from  his 
business  are  —  how  large  is  the  net  balance,  he  need  not  l)e  at  all 
concerned  to  know  how  much  his  gains  might  elsewhere  be.  The 
cost  account  —  so  called  —  for  his  purposes  will  amount  merely 
to  an  outlay  and  depreciation  account,  and  may  involve  no  refer- 
ence to  alternative  profits  or  alternative  interest  or  alternative 
products  of  any  sort.  He  is  interested  merely  in  arriving  at  a  net 
balance. 

But  for  the  economist  the  problem  is  not  to  arrive  at  the  net 
gain,  but  to  explain  market  ])rice  and  to  analyze  cost  of  production 
as  an  influence  bearing,  through  supply,  on  price.  For  his  purposes, 
therefore,  cost,  as  the  key  to  market  supply,  must  sum  up  the 
resistances  to  the  forthcoming  of  product. 

In  point  of  fact,  also,  the  economist's  Une  of  analj^sis  is  in  some 
cases  very  important  to  good  business  practice.  Shall,  for  example, 
the  Steel  Corporation  accept  a  particular  order?  To  decide  in 
the  affirmative  must  imply  not  only  a  balance  of  gain  in  prospect 
above  the  outlays  but  also  that  this  balance  outranks  any  alter- 
native balance.  It  is  the  relative  and  not  the  absolute  gain  that 
is  decisive  in  most  cost  problems.  So,  in  striking  a  dividend 
balance,  cost  may  mean  one  thing  ;  but  in  the  making  of  dividends, 
another  sort  of  accounting  and  another  meaning  for  cost  must  be 
recognized.  Not  any  sort  of  a  balance,  but  only  the  maximum 
balance,  leads  to  the  maximum  dividend. 

The  element  of  truth.  —  It  thus  appears  that  only  in  the 
sense  of  a  large  and  vague  general  principle  can  the  produc- 
tivity theory  be  adjudged  to  be  valid,  and  then  only  in  the 
sense  that  identifies  product  with  proceeds.  It  is,  indeed, 
past  question  that  the  bid  of  the  entrepreneur  for  the  serv- 
ices of  any  factor  must  find  its  motive  and  basis  in  the  added 
gain  result  in  prospect.  It  is  gain  that  furnishes  the  motive 
of  his  bid,  precisely  as  it  is  this  same  gain  that  prescribes 
the  limit  upon  his  bid.  And  in  a  general  way  it  must  be 
true,  if  competition  is  effective  and  complete,  that  the  entre- 
preneur pays  not  greatly  less  for  the  factor  than  what  he 
can  afford  to  pay.  Interpreted,  then,  to  mean  not  more 
than  this,  the  productivity  theory  is  unquestionably  tenable  : 


THE  DISTRIBUTIVE  PROCESS  151 

but  forthwith  it  is  to  be  added  that  so  interpreted  it  is  as 
trite  as  it  is  tenable  —  is,  indeed,  almost  self-evident. 

The  errors  and  excesses.  —  The  theory,  however,  goes 
much  further  than  this  to  positions  distinctively  its  own. 
It  says  that  under  perfect  competition  the  distributive  share 
apportioned  to  each  factor  would  be  the  precise  and  accurate 
correlative  of  its  contribution  to  gain ;  that  the  amount  of 
this  contribution  is  capable  of  being  accurately  determined, 
and  the  coincidence  of  it  with  the  amount  of  compensation 
established.  The  corollaries  are  also  formulated  without 
compromise  or  ambiguity :  (1)  the  competitive  system  is 
good  so  far  as  it  is  really  competitive  ;  (2)  as  a  system,  com- 
petition contains,  in  itself  and  by  its  own  inner  necessity, 
the  warrant  and  the  guarantee  of  justice;  if  anywhere  it 
falls  short  of  complete  equity,  there  is,  in  this  very  fact, 
proof  that  somewhere  the  competitive  process  has  not  been 
carried  out  to  the  full.  The  logic  of  the  system  is  a  perfect 
ethics.  Therefore  any  other  economic  order,  diverging  in 
its  results  from  what  perfect  competition  would  achieve, 
is  by  this  very  fact  discredited. 

Product  must  mean  proceeds.  —  For  an  accurate  under- 
standing of  the  issues  involved,  it  must  first  be  recognized 
that  the  productivity  under  consideration  means,  and  can 
mean,  nothing  more  than  private  gain  in  terms  of  price  — 
proceeds.  When  the  entrepreneur  pays  a  wage  or  a  rent, 
he  really  pays  for  the  result  that  he  hopes  to  attain.  It  is 
to  get  an  increment  of  price  that  he  consents  to  undergo  a 
price  outlay.  It  is  this  price  increment  that  sets  also  the 
outside  limit  upon  his  disposition  to  pay.  This  produc- 
tivity theory  appears,  then,  to  declare  that  what  the  em- 
ployed factor  gets  is  what  the  employer  can  afford  to  pay. 
In  fact,  he  does  not  always  pay  thus  much.  But  it  is  in 
any  case  clear  that  only  a  product  in  terms  of  price  can  serve 
as  a  motive  or  a  basis  for  a  price  outlay.  No  one  pays  or  gets 
paid  for  the  doing  of  a  thing  that  is  merely  useful. 

Employers'  surpluses.  —  Whether  there  is  any  other  test 
of  the  service  for  gain  attaching  to  a  day's  labor  than  the 
market  price  that  the  labor  commands  —  whether,  that  is 


152  THE  ECONOMICS  OF  ENTERPRISE 

to  say,  the  theory  does  not  determine  what  the  labor  ac- 
eomplishes  by  timling  out  wliat  it  sets,  as  the  basis  for  the 
conc'hision  that  what  it  gets  it  accompUshes,  is  a  question 
which  must  for  the  moment  be  postponed.  If,  however, 
the  theory  be  taken  to  assert  that  under  perfect  competition 
the  employer  would  have  to  pay  as  wage  or  as  rent  all  that 
he  can  at  the  outside  pay,  the  defect  in  the  theory  lies  in 
the  simple  untruth  of  the  assertion.  Entrepreneurs,  as 
we  have  seen,  differ  in  skill  and  in  the  direction  of  their 
skill.  The  actual  hire  of  any  serviceable  fact,  even  if  pre- 
cisely coincident  with  the  maximum  bid  of  some  one  compet- 
ing bidder,  is  altogether  unlik(>ly  to  be  coincident  with  the 
maximum  bid  of  the  successful  competitor.  All  that  the 
latter  needs  pay  is  enough  to  outbid  the  next  strongest  bid- 
der's bid.  There  may  be,  and  commonly  is,  for  the  success- 
ful bidder,  an  appreciable  differential  between  the  possible 
bid  and  the  actual  bid.  One  housewife,  for  example,  gets 
good  service  cheaply  from  a  maid  that  no  other  woman  can 
get  along  with  at  any  wage.  Stonewall  Jackson's  efficiency 
as  a  corps  commander  was  in  no  small  part  in  his  peculiar 
adaptation  to  the  needs  and  the  abilities  of  his  particular 
chief.  One  foreman  gets  excellent  results  from  one  man, 
and  entirely  fails  with  another  and  perhaps  a  better  man. 
You  like  the  man  that  I  dislike  and  dislike  the  man  that  I 
like.  Efficiency  is  a  quality  only  in  the  sense  that  it  is  a  rela- 
tion :   it  is  a  different  relation  to  each  different  entrepreneur. 

And  even  when  there  are  a  large  number  of  similar  pro- 
duction goods  to  be  sold  or  rented,  the  price  or  hire  that 
each  can  command  will  not  depend  upon  any  specific  effi- 
ciency of  each  item  or  of  any  item ;  for  with  every  change 
in  supply  a  new  efficiency  must  attach. 

And  even  if  this  difficulty  be  met,  something  more  serious 
is  in  waiting :  for  if  the  successful  bidder  for  the  isolated 
item,  or  any  successful  bidder  for  any  part  out  of  a  stock  of 
items,  were  to  withdraw  from  the  competition,  the  selling 
or  renting  price  would  necessarily  fall.  A  new  marginal 
adjustment  would  be  arrived  at  at  a  new  —  and  another  — 
so-called  specific  productivity.  But  this  must  imply  that  the 
larger  significance  to  the  out-bidding  entrepreneur  was  due 


THE  DISTRIBUTIVE  PROCESS  153 

in  part  to  his  presence :  it  was  a  gain-giving  significance 
relative  to  him  and  greater  than  the  other  significances  by 
reason  of  this  special  relation  to  him.  But  if  the  "  produc- 
tivity "  differs  as  different  entrepreneurs  are  present  or 
absent,  and  differs  with  each  different  entrepreneur,  it  is 
clearly  not  a  "  specific  "  productivity.  It  is  relative,  pre- 
cisely as  all  utility  is  relative. 

The  productivity  theory  may  plausibly  be  rested  either  on  the 
uncritical  assumption  of  the  fixation  of  price  by  marginal  utility, 
or  of  the  existence  of  the  social  organism.  The  two  assumptions 
are  really  one,  inasmuch  as  the  first  of  these  doctrines  can  have 
no  possible  standing  unless  upon  the  assumption  of  the  second  — 
and  no  very  tenable  standing  even  then. 

Assume,  however,  as  a  premise,  that  the  price  of  a  consumption 
good  is  determined  by  its  social  marginal  utility,  or  is  somehow 
commensurate  with  it.  Productive  goods  or  services  will  then 
be  paid  for,  it  is  argued,  in  direct  ratio  to  their  services  in  the  pro- 
duction of  the  socially  valued  products;  the  remunerations  are 
derivative  from  social  marginal  utility,  and  accurately  express  the 
contribution  to  it.  The  steps  may  then  be  reversed  to  show  that 
the  price  of  the  consumption  good  expresses,  in  turn,  its  marginal 
utility.  The  production  goods  are  now  taken  to  be  remunerated 
according  to  the  social  utility  of  their  services ;  these  remunera- 
tions are  costs  of  production  ;  the  goods  sell  as  determined  by  their 
costs ;  therefore  they  sell  in  proportion  to  the  social  utility  inhering 
in  the  factors  of  production  to  which  the  products  owe  their 
existence.  Thus,  granted  the  social  marginal  utility  explanation 
for  the  prices  of  consumption  goods,  one  may  deduce  the  social 
productivity  theory  of  distribution ;  or  granted  the  social  produc- 
tivity theory  of  distribution,  the  social  marginal  utility  of  con- 
sumption goods  may  be  equally  readily  deduced. 

The  ethical  inferences.  —  But  another  and  even  more 
serious  difficulty  attaches  to  the  productivity  theory  in  its 
strictly  ethical  aspect.  Nothing,  indeed,  so  far  urged  dis- 
turbs its  reasoning  for  its  larger  and  more  general  economic 
bearing.  And  nothing  will  so  disturb  it,  purely  as  an  actual, 
but  unprecise  account  of  the  entrepreneur  process  and  of  the 
entrepreneur  purpose.  But  it  remains  true  that  all  the 
bidding   is   entrepreneur   bidding   and   is   for   entrepreneur 


154  THE  ECONOMICS  OF  ENTERPRISE 

purposes.  Therefore  the  "  productivity  "  that  has  to  do 
witli  the  present  analysis  is  not  a  productivity  according 
to  the  test  of  social  welfare,  but  only  of  private  gain  —  pro- 
ceeds. There  is  no  necessary  implication  of  merit  or  of 
deserving  or  of  social  service.  What  the  entrepreneur  can 
pay  and  will  pay  has  to  do  solely  with  the  advantages  to  him 
in  his  pursuit  of  gain  in  terms  of  price.  The  wage  is  earned 
if  the  work  is  of  a  sort  to  bring  an  adequate  price  return  to 
thv  employer.  It  does  not  matter  whether  the  process  be  one 
of  adulteration,  the  compounding  of  poisons,  the  writing  of 
advertising  lies,  the  drawing  up  of  false  affidavits,  the  cir- 
culating of  libels,  or  even  the  commission  of  murder.  In 
the  strict  logic  of  business,  distinctions  of  this  sort  do  not 
exist,  and  the  terms  to  express  them  are  mere  irrelevancy 
or  vituperation.  And  even  w^hen  distributive  justice  may 
be  in  some  sense  attained,  it  must  be  solely  a  justice  between 
employer  and  employed.  Society  is  not  a  participant  in 
the  distributive  equity  of  competitive  business. 

Property  and  deserving.  —  And  further  :  even  if  the  rent, 
say,  of  land,  could  be  shown  to  be  accurately,  or  in  some  ap- 
proximate way,  the  correlative  of  its  productivity  in  terms  of 
price,  this  would  be  worlds  away  from  justifying  the  pay- 
ment of  the  rent  to  any  individual.  Assume  it  for  the  time 
being  as  true  that  the  entrepreneur  always  attains  his  ends 
of  private  gain  through  ministering  to  social  welfare  :  assume, 
that  is  to  say,  that  the  land  rented  by  him  contributes  not 
to  the  store  of  alcohol,  or  of  nicotine,  or  of  opium,  but  to 
the  supply  of  barley  for  the  making  of  bread.  Let  the  rent 
be  paid  and  let  it  be  neither  too  much  nor  too  little.  But 
paid  to  whom?  The  justification  of  the  private  ownership 
of  land  is  surely  not  to  stand  or  to  fall  with  the  proof  that 
the  rent  of  the  land  no  more  than  offsets  the  productive 
service  attributable  to  it.  This  question  of  the  reasonable- 
ness of  the  rent  concerns  solely  the  tenant  as  against  the 
owner.  Take  it  that  the  rent  is  really  just :  it  is  entirely 
another  question  whether  it  may  justly  accrue  to  any  private 
individual.  So,  likewise,  with  all  instruments  of  produc- 
tion, social  capital,  and  their  hires :  even  were  all  private 
capital  also  social  capital,  and  even  were  the  owners  of  this 


THE  DISTRIBUTIVE  PROCESS  155 

capital  receiving  less  than  the  productive  contribution  of 
their  properties,  the  collectivist  program  would  not  be 
appreciably  the  weaker.  It  would  still  be  open  to  the  so- 
cialists to  denounce  private  ownership  in  the  means  of  pro- 
duction —  perhaps  even  the  more  vigorously  that  the  entre- 
preneurs were  able  to  hire  their  equipment  so  cheaply.  Not 
the  necessity  or  the  nature  of  rent  and  interest,  but  the  pri- 
vate receipt  of  them  is  the  controversial  question.  There 
is  danger  in  mixing  ethics  with  economic  doctrine. 

We  have  seen  that  the  distributive  process  involved  in 
entrepreneur  production  is  not  the  only  distributive  process 
in  society,  but  is  the  primary  and  fundamental  process  ;  that 
it  is  the  same  process,  under  another  emphasis,  that  we  have 
already  studied  under  cost  of  production  —  the  outlays  in  the 
entrepreneur's  computation  of  costs  being  distributive 
shares  from  his  product ;  that  as  the  costs  are  price  items,  and 
the  product  a  price  item,  so  equally  are  the  distributive 
shares  price  items — the  distributive  process  a  price  process, 
and  the  distributive  shares  accruing  to  the  factors  merely  the 
prices  which,  by  virtue  of  their  gainful  significance  to  the  en- 
trepreneurs, the  factors  have  obtained  through  the  bidding  of 
the  entrepreneurs ;  that  the  process  by  which  these  prices  are 
attached  to  the  productive  factors  is  the  same  market  process 
of  the  equating  of  demand  with  supply  that  we  have  earlier 
analyzed  for  consumption  goods ;  that  precisely  as  the  de- 
mand price  of  a  bidder  for  a  consumption  good  does  not 
express  its  utility  to  him,  so  the  demand  price  of  an  entre- 
preneur for  a  production  good  does  not  express  its  produc- 
tivity to  him ;  that  precisely  as  the  market  price  of  a  con- 
sumption good  is  not  commensurate  with  any  but  the  mar- 
ginal bid  for  it,  so  the  market  price  of  the  production  good  is 
not  commensurate  with  the  paying  disposition  of  any  but  the 
marginal  entrepreneur,  and  then  only  at  his  marginal  bid ; 
that  as  the  entrepreneurs  are  different,  so  must  the  signifi- 
cance of  the  productive  good  to  each  be  a  different  signifi- 
cance ;  that  therefore  no  such  thing  as  a  specific  produc- 
tivity is  possible ;  that  all  productivity  must  be  relative 
precisely  as  all  utility  is  relative. 

And  further :  All  that  the  bid,  marginal  or  other,  of  any 
entrepreneur,  marginal  or  other,  can  report  is  the  maximum 
price  which  he  can  afford  to  pay  for  the  particular  productive 


156  THE  ECONOMICS  OF  ENTERPRISE 

item  rather  than  go  without  it ;  but  that  this  bid  cannot  ex- 
press the  productivity  of  the  item  to  him,  since  the  factors  do 
not  function  sei)arately  but  togetlier,  the  productivity  of  each 
dei)t>nding  therefore  upon  the  ])resence  of  the  others ;  that 
therefore  the  productivity  is  never  the  separable  and  specific 
prothictivity  of  each,  but  only  the  joint  and  insejjarable 
productivity  of  all  together ;  that  thus,  with  several  different 
factors  cooperating  together  to  a  common  end,  it  is  not  true 
that  the  maxinmm  payment  of  any  entrepreneur  expresses 
the  specific  productive  power  attaching  to  the  factor  in  ques- 
tion, but  only  the  loss  of  productivity  which  would  attend 
the  withdrawal  of  the  factor  —  a  loss  partly  due  to  the  re- 
duced efficiency  of  the  other  factors.  No  one,  therefore,  of 
all  the  difTerent  competing  entrepreneurs  is  capable  of  isolat- 
ing accurately  the  productive  efhciency  of  any  one  factor,  or 
of  giving  to  its  productivity  a  precise  expression,  even  for 
his  individual  purposes  and  for  his  own  price  bid.  Still 
less  can  market  price  express  any  separate  and  isolated 
and  specific  productivity.  No  distributive  share,  therefore, 
accruing  to  any  factor  is  the  precise  equivalent  of  its  pro- 
ductive efficiency,  but  is  only  the  market  price  of  this  effi- 
ciency. 

And  finally  :  Even  though  it  were  established  that  precisely 
what  a  factor  produces  it  gets  —  that  precisely  what  the  en- 
trepreneur pays  for  it,  it,  or  rather  the  owner  of  it,  deserves 
from  the  entrepreneur  —  all  this  would  fall  far  short  of  justi- 
fying competitive  distribution  —  would,  indeed,  be  in  the 
main  irrelevant  to  that  issue  :  (1)  the  motive  of  the  entre- 
preneur is  his  own  gain.  Service  to  him  may  be  a  service  to 
society,  or  may  be  neutral  to  society,  or  may  be  a  social  dis- 
service. The  several  distributive  shares  may  be  the  separate 
remunerations  of  several  associated  iniquities,  and  the  deriva- 
tive product  may  be  itself  an  ultimate  and  supreme  iniquity. 
(2)  The  actual  distribution  of  each  particular  product,  and 
of  products  in  general,  is  in  large  part  conditioned  on  existing 
property  rights  in  the  factors  of  production.  The  rent  of 
land  accrues  not  to  the  land  but  to  the  landlord  —  the  rent 
from  the  machine  or  the  patent,  not  to  the  machine  or  to  the 
patent,  but  to  the  owner  of  it.  Therefore  to  establish  the 
equivalence  between  deserving  and  receiving,  it  must  first  be 
sho^^Tl  that  the  present  property  institutions  of  society  are 
righteous  in  every  particular  —  inheritance,  property  in  land, 
property  in  franchises,  and  all  the  rest. 


THE  DISTRIBUTIVE  PROCESS  157 

The  next  chapter  will  show  that  the  different  factors  of 
production,  for  the  use  of  which  or  for  the  purchase  of  which 
the  entrepreneur  niust  pay  a  price,  are  not  three  or  four,  but 
legion  ;  that  consistent  classification  of  the  raw  materials  and 
of  the  instrumental  goods  employed  in  the  productive  process 
is  both  purposeless  and  impossible ;  that  such  outlays  as  are 
made  for  raw  materials  and  labor  and  instrumental  goods, 
while  cost  outlays,  are  not  all  of  the  cost  outlays ;  that  taxes, 
insurance,  advertising,  and  a  host  of  minor  items  must  be  in- 
cluded ;  that  there  are  still  other  resistances  to  be  computed 
which  yet  are  not  outlays  :  for  example,  discomforts  under- 
gone, alternative  profits  foregone,  risks  incurred ;  and  that 
in  addition  to  all  these  costs  there  must  be  computed  an 
interest  charge  on  the  total  invested  operating  fund. 

It  will  be  shown  also  that  all  durable  possessions  for  which 
rents  are  paid  or  incomes  received  are  equally  bases  of  costs 
when  these  possessions  are  employed  by  the  entrepreneur ; 
that,  for  cost  purposes,  no  distinction  is  either  relevant  or 
possible  between  land  and  other  instrumental  goods,  or  be- 
tween land  hires  and  other  hires  ;  that  all  durable  possessions 
are  equally  capital,  and  that,  when  employed  together  in  the 
productive  process,  all  have  the  same  rank  as  costs  and  the 
same  bearing  though  cost  on  the  price  of  the  product ;  that 
when  not  functioning  together  in  the  productive  process,  but 
returning  incomes  separately  to  their  possessors,  all  these 
possessions  remain  capital  by  the  same  title  of  the  incomes 
which  they  command ;  that  as  one's  fund  of  money  or  of 
purchasing  power  is  capital,  so  all  the  income-earning  posses- 
sions in  which  any  of  the  fund  is  invested  must  also  be  capital 
—  land  equally  with  all  other  durable  possessions ;  that  it 
does  not  matter  for  the  purpose  whether  one  leases  his  house 
and  lot  for  rent  or  occupies  it,  rides  his  horse  or  employs  it  in 
his  livery  business,  eats  his  chickens  or  sells  them,  consumes 
the  eggs  or  markets  them ;  that  the  proof  that  all  durable 
possessions  earn  an  income,  and  are  therefore  capital,  is  to  be 
found  in  the  fact  that  the  possessor  invested  his  capital  funds 
to  get  them,  or  pays  interest  on  the  purchase  price  to  enjoy 
them,  or  foregoes,  in  order  to  keep  them,  the  capital  funds 
which  the  selling  price  would  bring  him ;  that  just  as  the 
funds  in  hand  are  capital  by  virtue  of  their  earning  power,  so 
all  goods  which  absorb  the  fund  because  their  incomes  are 
preferred  to  the  income  from  the  fund,  must  be  capital  by 
the  same  test. 


158  THE  ECONOMICS  OF  ENTERPRISE 

Incidentally  to  establishing  the  foreooing  positions,  the 
ehajiter  will  discuss  the  various  attenij)ls  which  have  been 
made  to  distinguish  land  from  those  other  instrumental  goods 
which  are  ailmittedly  ca))ital,  by  distinctions  (1)  of  origin, 
(2)  of  ilegree  of  spatial  mobility,  (3)  of  degree  of  specializa- 
tion in  emplo3'ment,  (4)  of  degree  of  fixity  in  point  of  supply, 
(5)  of  prospect  of  future  modification  in  su])i)ly,  (6)  of  the 
relations  of  supply  to  cost  outlays,  distributive  shares  in 
general,  and  prices  of  products.  It  will  be  made  clear  that 
this  untenable  distinction  found  its  way  into  economic 
reasonings  through  the  necessities  of  the  labor  theory  of 
value,  which  holds  either  (1)  that  the  relative  prices  of  prod- 
ucts are  determined  by  the  relative  amounts  of  labor  ap- 
plied to  their  production,  or  (2)  that  these  relative  prices  are 
determined  by  the  relative  outlays  for  wages  incurred  in  pro- 
duction ;  that,  for  the  purposes  of  either  interpretation  of  the 
labor-cost  doctrine,  it  was  necessary  that  the  rent  of  land  be 
somehow  distinguished  from  other  rents,  and  be  interpreted 
as  a  result  of  price  rather  than  as  a  cause  —  as  a  "price- 
determined,"  rather  than  as  a  "price-determining,"  outlay. 


CHAPTER  XI 

THE  DIFFERENT  BASIS  OF  COSTS  AND  OF  DISTRIBUTIVE  SHARES 

The  different  directions  of  cost  outlay.  —  Whether  one  is 
producing  for  sale  or  for  his  own  consumption,  he  commonly 
finds  it  wise,  and  perhaps  even  necessary,  to  adopt  a  varied 
direction  of  investment.  For  the  farmer  there  are  lands, 
buildings,  tools,  machines,  repairs,  seed,  fertilizer,  labor,  in- 
surance, taxes,  and  the  like,  to  be  provided  for.  Together 
with  most  of  the  foregoing  costs,  the  manufacturer  may  have 
outlays  to  make  for  raw  materials  —  some  of  them  shoddy 
—  for  light  and  heat  and  ventilation  and  water  service,  for 
the  expenses  of  traveling  men,  for  advertising  by  newspaper 
or  circular  or  billboard ;  and  there  may  be  also  expenditures 
such  as  royalty  payments,  or  as  contributions  to  the  expenses 
of  political  campaigns.  To  most  of  these  expenditures 
the  merchant  will  add  outlays  for  the  expenses  of  window 
decorations,  of  rest  rooms,  of  sumptuous  fittings,  and  of  do- 
nations to  all  sorts  of  public  undertakings.  The  contractor 
in  public  work  may  find  himself  required,  as  part  of  his 
necessary  expenses  of  getting  on,  to  make  an  occasional  settle- 
ment with  the  city  councilman,  the  political  boss,  the  police- 
man, the  inspector. 

And  together  with  his  other  costs  each  of  these  entrepre- 
neurs will  include  a  charge  for  his  own  personal  services. 
And  all  of  these  costs  —  with  the  exception  of  his  personal 
remuneration,  his  profit  —  will  be  paid  for  out  of  the  entre- 
preneur's fund«,  whether  owned  or  borrowed.  All  of  these 
costs  are  price  outlays  in  production,  for  the  purpose  of  achiev- 
ing a  price  return  in  product. 

It  is  then  clear  that  to  summarize  costs  as  restricted  to 
four  classes  (1)  rent  of  land,  (2)  interest  on  capital,  (3)  wages, 
and  (4)  profits,  is  to  render  both  an  incomplete  and  inaccu- 

159 


160  THE  ECONOMICS  OF  ENTERPRISE 

rato  account.  There  are  other  costs,  as,  for  example,  outlays 
for  royalties,  taxes,  and  insurance,  —  costs  that  (it  awkwardly 
or  worse  into  this  fourfold  classification.  True,  these  out- 
lays are  made  out  of  capital.  But  this  does  not  differentiate 
them ;  so  are  all  the  other  outlays,  whether  for  the  wages 
of  labor  or  for  the  rents  of  lands  and  appliances.  Indeed, 
even  the  interest  on  borrowed  funds  must  be  paid  out  of 
capital.  To  appeal  to  the  sources  of  the  outlays  must  avail 
rather  to  cancel  the  classifications  than  to  establish  them. 

But  the  account  fails  in  something  worse  than  mere  lack 
of  exhaustiveness :  even  for  what  it  covers,  it  is  inexact. 
The  main  cost  categories  are  indeed  four,  but  they  are  not 
(1)  wages,  (2)  profits,  (3)  rent  of  land,  and  (4)  interest  upon 
capital.  Rather  they  are  (1)  wages,  (2)  profits,  (3)  instru- 
ment rents,  and  (4)  interest  (time  discount), — this  last 
being  merely  a  charge  for  the  total  capital  investment  em- 
ployed, computed  upon  the  basis  of  the  dollar-time  unit. 

Instruments  as  absorbing  capital;  the  hires  as  costs. — 
That  is  to  say,  among  all  his  different  lines  of  investment, 
the  entrepreneur  finds  it  to  his  interest  to  place  himself  in 
possession  of  various  sorts  of  tools,  machinery,  and  lands. 
No  one  of  these  is  more  than  another  an  aid  to  him  in  his 
gainful  undertaking.  No  one  of  the  outlays  imposed  upon 
him  is  more  or  less  than  any  other  the  necessary  condition 
to  his  enjoyment  of  the  attendant  advantages.  Each  of 
these  outlays  equally  with  every  other  must  be  reimbursed 
in  the  sale  price  ;  else  he  must  decline  to  maintain  his  product, 
either  restricting,  or  even  abandoning  entirely,  his  contribu- 
tion to  the  market  supply.  To  buy  or  hire  land  calls  upon 
him  for  an  investment  of  capital  just  as  does  an  investment 
in  tools  and  machines.  The  return  upon  his  investment 
in  land  equipment  is  a  remuneration  for  a  capital  outlay 
no  less  than  is  the  return  upon  machine  equipment. 

Is  land  capital  ?  —  How  far,  then,  and  for  what  purposes, 
is  it  worth  w^hile  to  divide  these  equipment  goods,  these  in- 
struments and  appliances  employed  in  the  productive 
process,  into  two  great  classes,  (1)  land,  (2)  capital?  Why 
is  not  land  merely  one  kind  of  capital  ?  or  why,  if  land  is 


DIFFERENT  BASIS   OF   COSTS   AND   OF  SHARES     161 

to  be  distinct  from  capital,  are  there  not  as  many  different 
classes  of  land  as  there  are  different  kinds  or  grades  of  land  ? 
What,  in  truth,  is  land,  and  what  is  capital?  What  are  the 
distinguishing  marks  or  tests?  What  purpose  does  the  dis- 
tinction serve,  once  it  is  accepted?  These  are  neither  new 
nor  easy  questions.  In  the  history  of  the  science,  they  have 
been  prolific  of  long  and  bitter  controversy.  They  still 
divide  the  science  into  distinctly  marked  and  opposing  schools 
of  thought.  This  main  and  central  problem  involves  a 
host  of  subordinate  issues.  The  solution  will  turn  out  to 
be  decisive  of  not  a  few  important  doctrinal  corollaries. 

What,  then,  is  capital?  —  The  earlier  doctrine,  still  a 
long  way  off  from  general  abandonment,  distributes  the 
sources  or  causes  of  wealth  into  three  great  classes,  called 
factors  of  production,  as  follows  :  (1)  labor,  the  human  ele- 
ment, (2)  land,  the  original  environmental  situation,  and 
(3)  capital,  the  productive  equipment  supplied  by  man  and 
ranking  as  part  of  the  present  environment  —  differing,  how- 
ever, from  land  in  the  fact  that  capital  is  produced  equipment, 
while  land  is  here  by  original  natural  bounty.  Thus  land 
and  capital  are  held  as  separate  divisions  of  the  environ- 
ment, together  comprising  the  aggregate  of  those  things  that 
serve  as  aids  or  auxiliaries  in  the  productive  process. 

The  later  view  —  the  view  which  will  be  presented  here 
as  the  preferable  and,  indeed,  as  the  only  tenable  view  — 
conceives  capital  as  including  all  durable  and  objective  sources 
of  valuable  private  income.  This  latter  doctrine  declines, 
therefore,  to  restrict  capital  to  the  raw  materials,  tools,  and 
implements  employed  in  the  technological,  mechanical, 
industrial  process  of  getting  goods  upon  the  market.  It 
includes,  it  is  true,  without  demur,  all  of  these  things,  since 
all  are  income-gaining  to  the  owner ;  but,  for  the  same  rea- 
son, it  includes  also  land. 

And  this  later  view  does  not  stop  here  ;  many  other  sources 
of  private  income  are  likewise  included.  Capital  is  made 
to  comprise  every  durable  item  of  private  property,  by  virtue 
of  the  fact  that  every  item  of  durable  private  property  must 
be  a  source  of  income  to  its  owner  ;  else  it  could  not  be  valu- 
able, and,  valueless,  could  not  be  property.     All  possessions, 


162  THE  ECOXOMICS  OF  ENTERPRISE 

then,  that  in  any  way  serve  the  individuars  end  are  ranked 
as  capital  by  the  sheer  title  of  their  productive  significance, 
their  rendering  of  income  to  their  owner. 

Thus  anything  that  earns  a  rent  is  capital,  whether  it  be 
land  or  a  machine  or  a  pleasure  boat  or  a  patent  right,  or  a 
franchise  right,  or  a  monopoly  —  it  being  essential  only 
that  the  thing  in  question  be  something  durable  that  pays. 
Nor  does  it  matter  whether  it  pays  by  being  rented  to  some- 
one else  or  by  being  used  by  its  owner.  Equally,  in  either 
case,  it  pays.  So  one's  own  dwelling  house  is  capital,  or 
the  pleasure  boat  that  one  uses  for  his  own  recreation  in- 
stead of  renting  it ;  one's  horse  that  one  drives,  as  well  as 
the  horse  in  the  livery  barn ;  the  furniture  that  one  uses, 
as  well  as  the  furniture  with  which  one  equips  a  rented  room 
or  house.  The  view  here  presented  holds,  then,  that  capital 
comprises  much  more  than  mere  industrial  equipment,  even 
after  land  is  included ;  that  instrument  goods  are  capital 
merely  as  one  sort  of  source  of  private  gain ;  but  that  the 
ultimate  fact  that  establishes  any  item  of  property  as  capital 
is  this  fact  of  rendering  an  income  to  the  owner  —  a  durable, 

\  objective  source  of  valuable  private  income.  Rent  is  therefore 
one  manifestation  of  interest,  and  whatever  item  of  property, 
land  or  other,  earns  it,  is  thereby  capital.  It  is  necessary 
merely  that  the  source  of  the  income  have  a  price  ascribed 
to  it  and  that  the  rent  which  it  earns  be  stated  in  terms  of  a 
percentage  upon  this  price,  and  forthwith  the  capital  and 
interest  relation  stands  forth  clearly. 

The  test  of  capital.  —  Anything,  then,  that  earns  rent  or 
interest  or  that  affords  valuable  service  with  passing  time 

<i  is  capital.  Capital  and  interest  are  correlative  terms.  The 
objective  source  of  income  is  capital :  the  income  from  capi- 
tal is  interest.  Thus,  a  credit  against  one's  neighbor,  or  a 
bond  against  the  government,  is  capital  merely  by  the  fact 
that  either  commands  an  interest  income.  So  of  good  will, 
patents,  trade  marks,  franchises,  monopolies. 

But  why  so  much  ado  ?  Does  it  at  all  matter  ?  If  roses  do  not 
altogether  depend  for  their  smell  upon  their  names,  need  it  signify, 
excepting  to  avoid  the  confusion  of  various  tongues,  whether  any 


DIFFERENT  BASIS  OF  COSTS  AND  OF  SHARES     163 

given  thing,  or  class  of  things,  is  to  be  termed  capital  ?  and  particu- 
larly, why  should  irreverent  innovators  insist  upon  their  especial 
novelties  of  terminology  and  upon  attacking  and  reforming  the 
dictionary  ? 

How  far  the  controversy  matters  must,  in  large  part,  await 
an  answer  in  the  further  development  of  the  discussion.  Histori- 
cally, at  any  rate,  although  perhaps  in  strict  logic  not  necessarily, 
this  distinction  between  land  and  capital  has  been  the  controlling 
distinction  in  economic  doctrine.  It  underlies  the  question  of  the 
relation  of  land  rent  to  cost  of  production  and  to  market  price. 
Thereby  it  is  the  central  doctrine  in  the  classical  theory  of  distribu- 
tion.    It  was  the  controlling  doctrine  in  the  labor  theory  of  value. 

How,  indeed,  did  any  one  ever  come  to  hold  that  the  prices  of 
goods  are,  either  as  matter  of  fact  or  as  matter  of  tendency,  propor- 
tional either  to  the  wages  or  to  the  labor  applied  to  their  production  ? 
Surely  these  prices  are  proportional  to  the  entrepreneur  costs 
of  production,  by  virtue  of  the  close  attendance  of  supply  upon 
cost.  But  among  these  entrepreneur  costs  there  are  rents  of  land, 
as  well  as  hires  of  machinery  or  outlays  for  raw  materials.  Some 
of  the  bushels  of  wheat  produced  upon  good  land  absorb  little 
labor,  precisely  because  the  land  is  so  good.  Other  bushels  are  more 
and  more  laboriously  produced,  as  the  particular  tract  of  land  is  harder 
and  harder  pushed  for  product,  or  as  the  new  lands  cultivated  be- 
come poorer  and  poorer.  Yet  all  bushels  of  one  quality  bear  at 
any  one  time  the  same  price,  despite  the  inequality  in  the  labor 
applied  or  in  the  wages  paid.  And  the  same  thing  holds  with  the 
products  of  machinery  —  the  poorer  the  equipment,  the  more  the 
labor ;  but  there  is  still  one  price  for  the  products.  If  prices  were 
to  be  made  proportional  to  the  labor  applied  or  to  the  wages  in- 
vested, something  had  to  be  done. 

Capital  viewed  as  stored-up  labor-cost.  —  But  this  something 
was  done.  All  capital  goods  — ■  tools,  machines,  and  the  like  — 
were  explained  as  merely  so  much  stored-up  labor,  or  as  the  stored- 
up  wages  paid  for  it ;  the  capitalist,  as  a  laborer  gone  to  seed ;  and 
thereby  the  product  of  capital  as  indirectly  the  product  of  the 
earlier  wage-paid  labor ;  interest  being  thus  mere  indirect  wages.  ^ 
It  was  implied  in  this  that  the  interest  payments  are  for  mere 
wear-out  of  the  principal  invested,  and  that  the  sum  of  all  the 
interest  payments  upon  a  given  investment  can  normally  or  regu- 
larly equal  only  the  original  capital  sum  invested  in  wages ;   and 

'  See  e.g.  Taussig,  Principles  of  Economics,  Vol.  I,  pp.  75,  77. 
(Or  infra,  p.  373.) 


164  THE  ECONOMICS  OF  ENTERPRISE 

that  somotime  a  givoii  capital  investnuMit  must  cease  its  career  of 
earninji;  interest.  But  observation  and  exjierience  combine  to  de- 
clare all  this  an  error.  And  there  was  a  still  further  difliculty  — 
a  (.lilKculty  fully  recognized  but  still  not  met — -of  explaining  the 
added  value  going  with  aging  wine,  or  the  growth  in  price  of  the 
sapling  reaching  up  to  become  a  tree.  But  such  as  it  was,  the 
view  commantled  a  fairly  general  acceptance. 

Thus  all  capital  having  been  traced  back  to  labor,  and  all  in- 
terest reduced  to  indirect  wages,  the  doctrine  that  the  prices  of 
things  are  proportional  to  the  contained  labor  —  or  to  the  wage 
outlay  —  was  appreciably  advanced.  There  remained  only  the 
difficulty  of  eliminating  land  and  its  rent  from  the  determination 
of  price.  This  was  achieved  by  declaring  that  while  interest  and 
wages  are  causes  of  price — -are  price-determining  costs  —  rent 
is  the  result  of  price ;  that  "  corn  is  not  high  because  rent  is  paid, 
but  rent  is  paid  because  corn  is  high  "  (Ricardo) ;  that  prices  are 
fixed  by  the  marginal  cost  of  production ;  and  that  this  marginal 
cost  takes  place  on  land  for  which  no  rent  is  paid,  land  barely  worth 
cultivating  without  rent,  land  at  the  margin  of  cultivation. 

Margins  and  marginal  cost.  —  This  view  of  the  case  gained  some 
support  from  the  fact  that  the  market  prices  of  agricultural  prod- 
ucts, like  the  market  prices  of  all  other  products,  appear  to  be 
commensurate  with  the  marginal  cost  of  production,  rising  as  it 
rises,  and  falling  as  it  falls.  It  was  indeed  clear  —  as  it  is  still 
clear  —  that,  as  the  marginal  cost  is  greater  or  smaller  relatively 
to  the  costs  of  other  goods,  the  supply  is  relatively  less  or  more, 
and  that  therewith  go  corresponding  changes  in  the  price  of  the 
product.  No  difficulty  was  felt  with  the  problem  of  causes,  or 
with  the  premise  that  it  is  the  marginal  cost  rather  than  the  total 
supply  of  product  that  fixes  the  price,  or  with  the  implication 
that  the  cost  of  production,  inclusive  of  the  rent,  is  lower  upon 
supra-marginal  land  than  upon  marginal  land,  or  with  the  assump- 
tion that  the  marginal  producer  is  necessarily  a  producer  upon 
rentless  land.  The  rent  was  declared  a  surplus  of  product  above 
cost,  rather  than  a  payment  imposed  upon  the  cultivator  by  the 
sheer  fact  that  without  this  payment  his  cost  would  be  exceptionally 
low,  and  his  margin  of  surplus,  of  product  above  cost,  unaccount- 
ably great. 

But  note  now  that  this  earlier  view  made  it  possible  to  regard 
interest  as  a  cause  of  price  and  rent  as  a  result,  only  upon  condition 
of  sharply  distinguishing  land  from  other  productive  equipment, 
and  of  establishing,  for  cost  purposes,  a  clear  line  of  separation 
between  the  hire  of  land  and  the  hire  of  capital  goods.     And  note 


DIFFERENT  BASIS   OF  COSTS   AND   OF  SHARES     165 

again  that  it  was  only  upon  this  basis  of  excluding  rent  from  price- 
determining  cost  that  the  proportionality  of  price,  either  to  labor 
pain  alone  or  to  wage  costs  alone,  could  maintain  even  the  semblance 
of  validity. 

It  is  therefore  imperative  to  examine  the  arguments  offered  in 
support  of  this  distinction  between  land  and  the  other  auxiharies 
of  production,  and  between  the  rent  of  land  and  other  rents,  as 
related  to  cost  of  production  and  to  market  price. 

Natural  and  artificial  instruments.  —  It  must  at  the  outset 
be  admitted  that  even  upon  the  assumption  that  all  the  different 
sorts  of  productive  equipment  are  to  be  included  within  the  capital 
classification,  there  still  remains  the  possibihty  of  distributing  these 
different  instrumental  goods  into  two  large  classes :  (1)  those 
originally  here  as  bounties  of  nature  —  natural  capital  —  and 
(2)  those  that  are  here  as  additions  to  the  original  environment  — 
produced  facts,  artificial  capital.  It  was,  then,  only  the  goods 
falling  within  the  second  class  that  the  earlier  view  accepted  as 
capital,  —  the  formulation  expressing  this  view -running  that  capi- 
tal is  all  wealth,  other  than  land,  employed  in  the  production  of 
further  wealth. 

This  view  evidently  conceives  capital  as  a  subhead  under  ma- 
terial wealth,  as,  in  logical  consistency,  must  be  true  of  any  view 
that  restricts  wealth  to  material  goods  and  that  interprets  produc- 
tivity as  meaning  merely  a  contribution  to  the  bringing  forth  of 
material  product.  This  earlier  view,  indeed,  regarded  capital 
from  the  point  of  view  of  social  productivity  rather  than  of  private 
gain.  Yet  somehow,  from  this  social  point  of  view,  it  excluded 
from  the  notion  of  capital  the  land  share  of  the  social  equipment  for 
productive  purposes.  The  economic  process  was  conceived  as 
a  strictly  industrial,  technological,  and  mechanical  process  —  not 
primarily  the  creation  of  values,  but  the  creation  of  things.  So 
the  different  factors  of  production  fell  into  classes  strictly  deter- 
mined by  their  technological  relations  to  a  strictly  mechanical 
process.  The  mechanical,  concrete,  industrial  equipment  at  the 
disposal  of  human  energy  —  human  energy  being  also  mechani- 
cally regarded  —  was  divided  into  two  great  classes,  i.e.  land 
equipment  and  equipment  other  than  land ;  corresponding  in  gen- 
eral to  the  distinction  between  the  extractive  and  the  non-extractive 
types  of  industry. 

Functions  versus  origins.  —  Now  while  this  classification  by 
origins  must  be  admitted  as  possible,  —  if  only  the  origins  were 
ascertainable,  and  if  at  the  same  time  it  could  make  the  slightest 


166  THE  ECONOMICS  OF  ENTERPRISE 

difTeronoo  to  any  man  wliat  tliosc  origins  wore  or  wore  not  —  the 
ditficnlty  still  presents  itself  that  the  mechanical  and  industrial 
functions  of  productive  factors  have  not  the  slightest  relation  to 
this  matter  of  origins.  Not  the  extractive  industries  alone,  but  all 
industries,  cmploj^  land,  precisely  as  all  industries  under  present 
conditions  make  use  of  equipment  other  than  land.  Nor  even  as 
a  distinction  of  degree  does  this  classification  by  origins  parallel 
any  distinction  relevant  to  technology.  Some  of  the  extractive 
industries,  mining,  for  example,  are  pronouncedly,  even  prevailingly, 
capital-using  in  their  technique ;  even  the  most  simple  extractive 
industries  make  appreciable  use  of  instruments  other  than  land. 
It  is,  however,  none  the  less  true  that  not  merely  food  and  raw 
material,  but  building  sites,  standing  room,  air,  climate,  scenery, 
neighborhood,  and  so  forth,  are  markedly  and  emphatically  of  land 
character  or  of  land  origin.  And  it  is  equally  unquestionable  that 
capital  goods  achieve  some  things  not  attainable  through  any 
possible  substitute,  precisely  as  other  commodities  are  in  a  peculiar 
degree,  or  exclusively,  dependent  on  labor.  You  cannot  have 
timber  from  labor  or  capital ;  neither  from  land  nor  capital  will 
you  get  a  skirt  dance ;  and  if  you  desire  a  certain  peculiar  quality 
of  screeching,  you  must  resort  to  a  phonograph  or  to  a  calliope 
as  against  any  form  of  land  or  labor. 

But  note  once  again  how  illogical  in  its  technology  all  of  this  is ; 
for  while  it  is  true  that  labor  and  capital,  when  denied  recourse 
to  land  in  the  unpriced  and  purely  concrete  and  physical  sense, 
will  yield  no  timber,  it  is  at  the  same  time  true  that  they  will  give 
timber  plentifully  enough  if  strictly  limited  in  their  application 
to  valueless  land,  that  is,  if  confined  to  what,  in  the  economic  and 
value  sense,  is  no-land.  And  some  day  the  technology  of  timber 
production  may  make  of  timber  a  laboratory  product. 

Technology  as  test.  —  And  it  is  all  the  while  to  be  remembered 
that  these  technological  differences  and  specializations,  while  of 
unquestionable  actuality,  are,  in  fact,  as  marked  between  one  item 
of  land  and  another,  or  between  one  item  of  capital  goods  and 
another,  or  between  one  laborer  and  another,  as  between  capital 
goods  and  labor,  labor  and  land,  or  land  and  capital.  For  market 
purposes  agricultural  machinery  is  more  closely  akin  to  wheat  land 
than  to  machinery  for  producing  watches  or  chronometers ;  cotton 
lands  are,  from  the  same  point  of  view,  more  like  sheep  than  like 
timber  lands  or  iron  lands  or  v/heat  lands ;  in  point  of  products, 
violin  and  sea  are  not  more  unlike  than  virtuoso  and  sailor,  or  than 
prima  donna  and  stoker. 

In  truth,  also,  if  productive  factors  are  to  be  distinguished  accord- 


DIFFERENT  BASIS   OF   COSTS   AND   OF  SHARES     167 

iiig  to  technological  considerations,  not  two  or  three  but  countless 
categories  of  productive  factors  will  have  to  be  recognized. '^ 

Origins  as  test.  —  But  even  were  the  question  of  origins  relevant 
to  the  technology  of  the  case,  the  distinction  would  remain  entirely 
hopeless  of  ap])lication.  It  leads  nowhere  when  attempt  is  made 
to  apply  it.  From  among  all  the  changes  of  all  the  ages,  who  can 
undertake  to  tell  what  environmental  changes  have  been  due  to  envi- 
ronmental processes  as  against  human  agencies?  What  part,  for 
instance,  of  the  fertility  or  the  infertility  of  the  land  has  been  due 
to  its  treatment  at  the  hands  of  man,  to  his  fertilizings,  his  exhaust- 
ings,  and  his  denudings  ?  What  part  to  fostering  or  wasting  winds, 
to  corals,  to  birds,  to  bugs,  to  worms,  to  microbes?  What  share 
of  the  value  of  the  house  traces  back  to  the  timber  values  of  the 
natural  forest,  and  what  part  to  industrial  processes?  Even  with 
the  case  of  machinery,  the  typical  form  of  capital,  human  wisdom 
would  fall  far  short  of  distributing  the  final  value  between  the  origi- 
nal ore  value  as  against  the  labor  value,  the  coal  value,  and  the  tim- 
ber value.  Nor,  for  any  one  of  these  various  shares,  would  it  be 
possible  to  determine  how  far  land  rents,  as  expressed  in  warehouse 
and  transportation  charges,  have  counted  in  the  case.  And  finally, 
if  any  one  could  accredit  either  the  land  or  the  warehouse  to  its 
particular  origins,  is  it  to  be  supposed  that,  as  shares  in  the  total 
hire  of  the  machine,  the  remunerations  would  forthwith,  either 
in  the  collective  or  in  the  competitive  reckoning,  take  on  a  new 
relation  to  the  cost  of  the  product  or  to  its  price  ? 

But  in  the  larger  social,  historical,  and  philosophical  view,  the 
distinction  remained  still  valid  —  only  that  it  was  not  valid  for 
any  purposes  of  competitive  entrepreneur  activity,  or  for  any 
problems  of  market  value  and  price,  or  for  the  analysis  of  the  com- 

1 "  The  grouping  of  the  factors  of  production  into  the  three  classes, 
labor,  land,  and  capital,  is  by  no  means  final.  There  are  various 
kinds  of  labor,  of  land,  and  of  capital.  Two  different  kinds  of 
labor  may  be  performing  functions  which  differ  almost  as  widely 
as  those  performed  by  labor  and  capital,  or  by  labor  and  land. 
The  work  of  a  bookkeeper  differs  as  widely  from  that  of  a  ditch 
digger,  as  that  of  a  ditch  digger  does  from  that  of  a  steam  shovel. 
Therefore,  the  same  reasons  which  favor  the  separation  of  labor 
and  capital,  in  order  that  they  may  be  treated  as  distinct  factors, 
will  also  favor  the  separation  of  one  kind  of  labor  from  another, 
of  one  kind  of  capital  from  another,  and  of  one  kind  of  land  from 
another."  Thomas  Nixon  Carver,  The  Distribution  of  Wealth, 
New  York,  1908,  p.  85. 


108  THE   ECO,\OMICS  OF  ENTERPRISE 

pctitive  distributive  process.  It  was,  however,  unfortunately 
assumed,  and  still  is  eonunonly  assumed,  that  what  is  true  for  social 
purposes  holds  also  for  the  competitive  analysis. 

But  other  arguments  were,  and  still  are,  urged  in  support,  of  the 
distinction  between  land  and  other  equipment  goods.  Tlic  following 
is  a  summary  of  the  entire  position  as  presented  by  one  of  its  de- 
fenders. "  In  many  essential  respects  land  and  capital  take  dif- 
ferent ways.  (1)  The  former  is  immovable  ;  the  latter,  for  the  most 
part,  movable.  (2)  The  former  is  a  gift  of  nature;  the  latter, 
a  result  of  labor.  (3)  The  former  cannot  be  increased,  the  latter 
can  be.  (4)  The  landowner  has  a  social  and  economical  position 
essentially  different  from  that  of  the  capitahst;  property  in  land 
is  justified  on  essentially  different  grounds  from  property  in  movables. 

(5)  Land  is  the  special  object  of  a  kind  of  production  which  is 
economically    cUstinguished    by    many     important    pecuharities. 

(6)  Income  from  land,  while  subject  to  many  laws  in  common 
with  income  from  capital,  obeys  many  distinct  laws  of  its  own  — • 
land  rent,  for  instance,  rising  with  economical  development,  while 
interest  falls.  On  all  these  considerations,  the  number  of  which 
might  easily  be  increased,  it  is  most  convenient  to  keep  land  quite 
distinct  from  the  other  kinds  of  productive  wealth."  ' 

(1)  As  to  the  immovability  of  land  :  and  the  movability  of  capital : 
Even  were  the  immovability  of  land  a  fact,  it  would  be  irrelevant. 
But  it  is  not  even  a  fact,  otherwise  than  as  a  spatial  or  geographical 
matter,  and  not  altogether  true  then.  Many  of  the  improvements 
made  upon  land,  or  incorporated  with  it,  are  equalh^  as  irremovable 
as  the  land  itself :  wells  once  dug,  improvements  in  mines  or  upon 
waterfalls,  are  prone  to  stay  where  placed ;  so,  also,  are  office- 
buildings.  On  the  other  hand,  by  carting  loam  or  by  grading,  by 
the  filling  of  swamps  or  water  fronts  or  marshes,  to  say  nothing 
of  the  action  of  wind  and  tide  and  wave,  the  seeming  fixity  of  land 
is  appreciably  disturbed.  And  the  mere  question  of  immovability 
as  a  simple  matter  of  superficies  or  of  extension  is  not  to  the  point  t 
for  in  its  aspect  of  effectiveness  for  production,  its  technological 
significance,  land  can  be  worn  out,  displaced,  or  renewed  as  readily 
as  other  instrumental  goods,  and  sometimes  much  more  quickly. 
Most  New  England  land  cannot  be  cropped  beyond  five  or  six 
years  without  renewal  through  fertilizers,  unless  upon  terms  of  the 
land  becoming  fit  only  for  pasture.  A  linotype  machine,  on  the 
contrary,  has  a  fife  of  several  decades  without  serious  need  of 
repair. 

1  EuGEN  v.  Bohm-Bawekk,  Positive  Theory  of  Capital,  p.  55. 


DIFFERENT  BASIS   OF   COSTS   AND   OF  SHARES     169 

Nor  is  the  specialization  of  the  instrument  to  the  production  of 
any  one  product  more  marked  with  land  than  with  machinery. 
Some  machinery  —  much  machinery  — ■  is  serviceable  for  only 
one  purpose  or  in  only  one  line  of  production,  and  is  only  at  great, 
or  even  at  entire,  loss  to  he  moved  to  another  plant,  to  say  nothing 
of  employed  in  another  industrj^  And  this  is  true  in  varying 
degrees  of  all  the  different  forms  and  conditions  of  capital  goods 
of  land  and  of  labor.  And  practically  all  lands  and  all  other  in- 
strumental goods  are  mobile  for  the  purposes  of  the  individual 
owner  in  the  sense  that  they  can  be  realized  on  in  the  market.  This 
last,  however,  it  must  be  admitted,  is  not  a  technological  mobility. 

(2)  Origins.  —  That  land  in  its  original  condition  is  or  was  a 
gift  of  nature  must,  as  we  have  seen,  be  taken  as  unquestioned: 
but  so  equally  of  diamonds  and  timber  and  coal  and  iron ;  and  in 
any  case  the  point  is  not  relevant  to  a  technological  classification 
of  productive  factors. 

(3)  Terms  of  supply.  —  There  is  more  in  the  notion  of  the  relative 
fixity  or  inelasticity  of  the  land  supply,  as  a  question  not  of  what 
actually  is,  but  of  what  is  likely  to  be,  —  the  economic  prospect 
socially  viewed.  But  none  the  less  is  the  amount  of  machinery  at 
any  one  time  as  fixed  and  definite  a  fact  as  the  amount  of  land ; 
and  there  is  always  enough  of  either  so  that  any  individual  can 
always  get  all  that  he  has  occasion  for.  He  has  only  to  pay  the 
price  or  the  rent.  For  any  one  individual  or  for  any  one  productive 
undertaking,  there  is  no  limit  upon  the  supply.  It  is  then  irrelevant 
to  the  individual  interests  that  the  supply,  either  of  machines  or 
of  land,  is,  at  any  given  time  and  as  an  aggregate,  a  limited  supply. 
And  were  it  relevant,  the  effect  of  limitation  holds  equally  for 
machines  as  for  lands.  At  any  given  time  there  is  what  there  is 
of  either,  no  matter  how  either  may  later  change.  Note  also  that 
the  limitation  applies  in  the  same  degree  and  in  the  same  sense  for 
the  supply  of  human  beings  and  their  labor.  This  fact,  however, 
has  never  recommended  itself  as  justifying  the  exclusion  of  wages 
from  cost. 

But,  even  if  this  prospective  scarcity  or  dearth  of  land  could  be 
accepted  as  a  certainty,  is  there  good  ground  for  asserting  that  the 
rent  which  the  land  bears  to-day  is  any  the  less  a  cost  to-day  ?  If 
it  were  proved,  or  otherwise  accepted,  that  labor  is  likely  to  get 
more  scarce,  would  this  suffice  to  exclude  present-day  wage  outlays 
from  present-day  costs?  Must  every  basis  of  cost  promise  with 
certainty  to  function  as  a  still  greater  cost  in  the  future,  in  order 
that  it  function  as  a  cost  at  all  now?  Must  it  be  twice  a  cost  in 
order  to  be  once  a  cost? 


170  THE  ECONOMICS  OF  ENTERPRISE 

But,  after  all,  it  must  be  noted  of  tliis  prospective  land  scarcity 
(1)  that  it  is  all  a  mere  matter  of  prophecy,  and  (2)  that  instead 
of  approaching,  as  is  ordinarily  assumed,  to  a  moral  certainty,  it 
is  not  much  better  than  conjecture.  The  past  three  or  four  hundred 
years  ai)pear  to  have  jiresented  the  ])henomenon  of  increasing  land 
plenty  relatively  to  labor  and  caj^ital.  With  tlie  forces  of  exjjlora- 
tion  and  of  developing  transportation,  new  supi)lies  of  land  have 
far  outrun  the  increase  of  pojiulation.  Elasticity  has,  indeed,  in 
a  surpassing  degree  —  probably,  it  is  true,  hardly  again  to  be 
duplicated  —  characterized  the  supply  of  land.  Capital  mean- 
while appears  not  to  have  increased  beyond  the  exjoansion  of  the 
demand  afforded  by  the  increase  in  the  supply  of  land  and  the  growth 
of  population  ;  since  interest  appears  to  have  been,  in  some  countries 
of  Europe,  as  low  one  hundred  and  fifty  years  ago  as  to-day ;  then, 
with  advancing  capitalistic  opportunities,  to  have  risen ;  later, 
with  the  progressive  exhaustion  of  the  new  opportunities  offered 
by  increasing  population  and  enlarging  land  supply,  to  have  fallen. 
Thus,  while  a  future  shortage  in  the  supply  of  land  looks  probable, 
it  is  not  at  all  certain.  For  aught  we  know  to  the  contrary,  chem- 
istry may  sometune  solve  the  problem  of  food  production  without 
recourse  to  agricultural  methods.  The  secret  once  learned,  the 
nitrogen  in  the  air  of  the  back  yard  and  the  ton  of  coal  in  the  bin 
may  furnish  food  for  an  ordinary  family  for  a  year.  And  it  is  to 
be  added  that  in  the  future,  as  in  the  past,  much  will  be  accom- 
plished by  improving  transportation  to  mitigate,  if  not  to  prevent, 
the  conjectural  dearth  of  land. 

And  even  admitting  the  general  validity  of  this  forecast  of  the 
inelasticity  of  the  land  supply  —  as  probably,  indeed,  we  ought  — 
it  is  the  more  important  to  recognize  that  expanding  knowledge 
(development  in  the  human  factor  of  production),  or  impro\ang 
transportation  (development  in  both  the  human  and  the  capital 
factors),  may  function  technologically  as  substitute  for  land. 
Bettering  transportation  is  more  land ;  true,  geographically  speak- 
ing, land  is  not  made ;  but  accessibility  is  made,  and  upon  an  enor- 
mous scale ;  land  sufficiency,  like  land  value,  is  in  large  degree 
positional. 

But  further :  if,  as  technological  facts,  these  probabilities  of 
change  are  taken  to  justify,  for  purposes  of  economic  theory, 
a  separate  category  of  land  wealth  as  against  other  wealth, 
there  is  forthwith  to  be  undertaken  an  indefinitely  large  task  of 
further  classification  or  of  subclassification.  For  •  wliile  grain 
land  may  be  becoming  seriously  scant,  range  lands,  or  champagne 
lahds,  or  mines,  or  fisheries  may  become  more  plentiful  or  more 


DIFFERENT   BASIS   OF   COSTS   AND   OF  SHARES     171 

accessible.  So,  also,  while  the  provision  of  wooden  implements  is 
becoming  increasingly  inadequate,  the  different  sorts  of  machinery 
and  tools  of  metallic  material  may  be  growing  progressively  cheap ; 
and  meanwhile  electrical  apparatus  is  likely  to  abound.  And 
similarly  for  the  human  factor  ;  as  one  kind  of  man,  say  the  athlete 
or  the  unskilled  workman,  is  becoming  relatively  more  scarce, 
doctors  of  philosophy  may  more  than  generously  multiply. 

(4)  That  the  land  owner  has  a  peculiar  social  or  political  standing 
is  matter  neither  of  economics  nor  of  technology,  but  solely  of  ethics 
or  of  law  or  of  politics  —  or  perhaps  of  sociology  —  unless,  indeed, 
these  social  and  political  advantages  are  themselves  ranked  as 
valuable  economic  incomes.  It  may  well  be  true,  however,  that 
the  distinction  between  earned  and  unearned  wealth,  between  wealth 
socially  created  and  wealth  individually  created,  needs  to  be  drawn 
as  bearing  upon  the  justifiable  limitations  upon  private  property 
or  upon  the  direction  in  which  tax  reform  may  be  wisely  sought. 
But  the  distinction  between  natural  and  artificial  wealth  would 
suffice  for  this  purpose.  When  that  which  ought  not  to  be  owned 
has  come  to  be  owned,  it  is  not  the  less  capital  by  virtue  of  the 
ethical  facts ;  nor  do  economic  classifications  stand  or  fall  with 
the  social  appraisals  which  these  facts  may  invite. 

(5)  Diminishing  returns.  —  The  point  as  made  by  Bohm- 
Bawerk  —  that  land  as  a  productive  factor  is  peculiar  in  important 
respects  —  is  difficult  of  discussion.  Perhaps  the  so-called  law 
of  diminishing  returns  is  especially  in  mind  —  of  which  there  is 
much  more  to  be  said  later.  Stated  in  the  large,  this  law  may  be 
taken  to  assert  that  any  given  piece  of  land  cannot  be  harder  and 
harder  pushed  for  product,  excepting  upon  terms  of  less  and  less 
generous  response.  Surely  there  could  be  no  such  thing  as  land 
rent,  were  there  no  limit  upon  the  supply  of  land ;  but  this  is  merely 
to  say  that  all  value,  whether  for  land  or  for  machines,  or  for  shoes, 
or  for  hats,  exists  only  as  dependent  upon  some  degree  of  scarcity. 

And  surely,  if,  with  any  given  piece  of  land,  increased  expenditure 
upon  the  land  were  not  attended  with  a  constantly  falling  com- 
pensation both  in  volume  and  in  value,  there  could  be  no  land 
scarcity  and  no  land  value.  But  this  is  equally  true  of  mowing 
machines  or  horse  rakes.  So,  if  one  pound  of  phosphate  would 
suffice  to  fertilize  a  continent  of  land,  phosphate  would  be  safe 
from  ever  becoming  dear  in  price ;  or  if  one  hour  of  labor  would 
do  all  the  work  to  be  done,  labor  and  its  products  could  not  be 
rare.  And  surely  if  only  the  non-land  expenses  of  production  be 
doubled,  there  must  result  less  than  a  doubled  product :  the  pro- 
ductive undertaking  as  a  whole  has  not  doubled.     If  this  fact  is 


172  THE  ECONOMICS  OF  ENTERPRISE 

all  that  is  intondod  to  he  formulated  under  the  competitive  rendering 
of  the  law  of  tlimiiiishiii,u;  returns,  the  law  must  be  ]ironounced  to 
ho  axiomatieally  valid,  hut  valiil  equally  for  capital  instruments 
and  for  lahor  agents  in  all  their  various  comhinations.  l']ach  case 
under  the  law  stands  as  mere  illustration  of  the  fact  that  if  only 
a  part  of  the  productive  factors  are  increased,  the  product  will 
not  respond  with  the  same  increase  as  if  all  the  factors  are  doubled. 

But  the  law  is  often  formulated  to  assert  that  if  the  application 
of  expense  to  the  land  be  doubled,  but  the  land  not  doubled,  the 
extra  returns  will  fail  of  proportion  to  the  increased  expense.  And 
this  formulation  of  the  law  is  also  valid,  even  if  not  quite  axiomatic  ; 
proper  proportions  of  land  value  with  other  values  must  be  main- 
tained, or  the  returns  will  be  a  disappointment ;  a  bad  combination 
gives  bad  results.     But  in  this  there  is  nothing  peculiar  to  land. 

(6)  Peculiar  laws.  —  It  cannot  be  admitted  that  land  rent  has 
its  own  distinct  general  laws.  Many  forces  in  economic  develop- 
ment tend,  as  we  have  seen,  to  reduce  land  rents,  as  well  as  machine 
rents.  Nor  is  it  true  that  investments  in  land  earn  lower  rates 
of  interest  than  other  investments,  if  all  the  different  incomes  are 
allowed  for,  or  that  land  properties  arrive  at  a  market  value  by 
processes  different  from  other  properties. 

What  capital  is.  —  It  will  shortly  be  made  clear  that  the 
process  by  which  the  market  prices  of  different  lands  are 
derived  from  their  earning  powers  is  the  very  same  process 
which  applies  to  all  other  durable  properties.  Tested,  then, 
by  the  ability  to  earn  interest  upon  the  invested  funds,  land 
is  capital.  Tested  by  the  fact  that  its  market  price  is  the 
capitalized  present  worth  of  its  future  incomes,  it  is  capital. 
Tested  by  the-  fact  that  its  possession  is  desired  for  the 
incomes  which  it  controls,  it  is  capital,  just  as  is  any  machine 
or  other  implement  of  production.  Tested  by  the  similarity 
of  a  town  lot  to  a  town  residence,  as  each  a  durable  consump- 
tion good,  the  lot  is  capital. 

The  test  of  capital  is,  then,  in  the  rendering  of  income 
with  passing  time.  Any  durable  objective  source  of  valuable 
private  income  is  to  be  recognized  as  capital :  the  phe- 
nomena of  interest,  of  capitalization,  and  of  a  deriva- 
tive present  value  are  present.  Land  is  capital  —  agricul- 
tural land,  or  factory  land,  or  the  sites  of  farmhouses,  or  of 


DIFFERENT   BASIS   OF   COSTS  AND   OF  SHARES      173 

country  mansions,  or  of  city  palaces,  or  of  city  tenement 
houses,  or  of  city  shops  —  all  lands,  rendering  a  valuable 
income,  and  coming  thereby  to  command  a  price. 

The  test  of  capital  is,  therefore,  not  in  the  fact  that  it  is  an 
intermediate  in  some  mechanical  process,  or  that  its  results 
are  finally  incorporated  in  some  addition  to  the  sum  of  tan- 
gible material  things ;  else  ice  stored  in  winter  for  summer 
use,  or  fancy  cheeses  taking  on  new  delicacies  of  mouldy 
flavor,  or  meat  warehoused  for  salt  or  pickle,  or  grain  in  the 
elevator,  or  fruit  or  eggs  or  poultry  in  cold  storage  — 
would  all  fall  out  of  the  capital  category.  Nor  if  the  test 
were  in  the  materiality  of  the  product  could  a  bus,  or  a  pas- 
senger coach,  or  an  excursion  boat  be  ranked  as  capital. 

Nor  is  the  test  better  found  in  the  wholesomeness  of  the 
consumption,  or  in  some  other  possible  social  service  at- 
tendant upon  the  thing  or  upon  its  product.  It  suffices 
merely  that  the  property  earn  an  income,  or  that  its  product 
command  a  price.  Whether  the  stale  cheese  is  dietetically 
better  than  the  fresh,  the  corned  beef  or  the  ham  more  di- 
gestible than  fresh  beef  or  pork,  the  whisky  more  whole- 
some than  the  rye,  or  the  beer  than  the  barley  —  is  not  to 
the  purpose.  If  whisky  is  wealth,  distilleries  must  be 
capital.  Opium  being  wealth,  and  opium  lands  commanding 
rents,  opium  lands  are  capital.  Corsets  sell,  therefore  corset 
factories  are  capital. 

And  if  the  test  is  neither  in  the  materiality  nor  the  whole- 
someness of  the  product,  it  must  be  equally  clear  that  it 
cannot  be  in  the  materiality  of  the  property  on  which  the 
product  is  conditioned.  The  differences  in  the  prices  of 
dwelling  sites  are  mostly  due  to  differences  of  position,  and 
the  incomes  are  mostly  such  intangible  facts  as  space,  view, 
convenience,  neighborhood  associations,  and  social  prestige. 
Equally  well,  also,  may  the  sources  of  the  income  be  intan- 
gible —  patents,  franchises,  monopolies,  good  will,  political 
privilege,  police  favor. 

Where  discount  is,  capital  is.  —  But  this  is  not  all  of  the 
doctrine  here  to  be  presented :  the  capital  category  must 
obviously  be    extended  so    far  as  to    comprise  all  durable 


174  THE  ECONOMICS  OF  ENTERPRISE 

it(Uiis  of  property  —  all  things,  that  manifest  the  phenom- 
enon of  interest  —  or,  to  jiiit  it  still  more  accurately,  all 
things  to  which  the  principle  of  time  perspective  applies 
in  the  j^rocess  of  arriving  at  a  present  worth.  C^apital 
includes,  that  is  to  say,  all  possessions  that  furnish  to  their 
possessor  an  income  with  passing  time  —  all  things  that 
require  for  the  rendering  of  their  service  an  interval  of 
time  so  far  appreciable  that  some  of  these  services  suffer  in 
present  worth  through  the  effect  of  their  futurity.^  One's 
own  home  or  one's  carriage  yields  him  a  succession  of  valu- 
able services :  that  is  why  he  bought  it  and  paid  cash  for 
it,  or  still  pays  interest  on  the  purchase  price.  All  goods  also 
that  take  time  in  which  to  achieve  their  value,  to  grow  into 
a  tree,  to  ripen  a  crop,  to  mature  a  coupon,  fall  under  this 
principle  and  are  thereby  capital.  Likewise,  if,  with  the 
lapse  of  time,  the  value  increases,  whether  by  one  sheep 
growing  into  two,  or  one  small  sheep  into  one  large  one,  or 
one  superfluous  sheep  to  a  famine-time  sheep,  the  thing  which 
is  the  basis  of  increase  is,  by  that  very  fact,  established  to 
be  capital.  So  long  as,  with  passing  time,  the  objective 
good  so  changes  its  utility  in  relation  to  its  possessor,  or 
so  long  as  its  possessor  so  changes  in  needs  and  desires  or 
in  provisionment  as  to  modify  the  utility  relation  between 
the  good  and  himself,  there  is  room  for  the  rendering  of  an 
income,  and  of  an  income  susceptible  of  a  discount  into  a 
present  worth.  And  more  than  this :  as  the  time  draws 
nearer  at  which  a  good  can  render  its  service,  there  may  be. 


'  To  remember  the  immediate  past  and  to  anticipate  the  im- 
mediate future  is  the  most  striking  function  of  consciousness. 
Indeed,  what  we  call  the  present  instant  is  something  that  hardly 
exists  except  in  theory.  .  .  .  Practically  what  we  call  our  present 
is  something  that  has  a  certain  length  or  breadth  of  duration,  and 
is  composed  of  two  halves,  one  being  our  immediate  past,  the  other 
our  immediate  future.  What  we  feel  ourselves  to  be  at  anj'  given 
moment  is  what  we  were  just  before  and  what  we  are  just  about 
to  be  :  we  recline  on  our  past  and  incline  toward  our  future,  and 
that  reclining  and  inclining  seem  to  be  the  very  essence  of  our 
consciousness.  So  that  consciousness  is,  above  all,  a  hyphen, 
a  tie  between  past  and  future.  —  Henri  Bergson,  "  Life  and 
Consciousness,"  The  Hibberl  Journal,  October,  1911. 


DIFFERENT  BASIS   OF   COSTS   AND   OF  SHARES     175 

by  this  very  fact,  an  increase  in  its  present  worth.  Con- 
versely, there  commonly  goes  with  remoteness  a  diminution 
of  present  worth.  This  fact  of  futurity  manifests  itself 
when  viewed  from  the  beginning  of  the  period,  as  a  diminu- 
tion, as  a  discount ;  the  same  period,  when  looked  back  upon 
as  past,  interprets  the  same  fact  as  a  growth  in  value.  Thus 
all  goods  that  have  a  time  dimension,  all  durable  goods,  mani- 
fest the  interest,  or  time  discount,  phenomenon ;  all,  there- 
fore, are  capital.  Capital  is  wealth  in  its  time  dimension : 
value  in  time.  All  instrumental  goods,  land  or  other,  are 
evidently  capital.  And  if  the  land  on  which  one  pastures 
his  flocks  is  capital,  so  is  his  yard  or  his  park  wherein  he 
pastures  himself.  And  if  land  used  for  building  purposes 
is  capital,  then  all  consumption  goods  which  are  in  any  part 
postponed  in  use  must  be  included ;  all  are  held  because  an 
advantage  or  increment  lies  with  postponement.  The  very 
fact  of  postponement  proves  that  the  present  worth  of  the 
postponed  use  outranks  in  estimation  the  present  use.  Even 
with  goods  deteriorating  or  decaying,  physically  or  chemi- 
cally considered,  the  advantage  in  present  worth  is  on  the 
side  of  delay,  or  they  would  not  be  held.  It  is  not  conclu- 
sive that  some  of  the  apples  stored  in  the  cellar  will  rot,  or 
that  the  ice  in  the  shed  will  lose  half  its  weight  before  sum- 
mer. The  present  worth  of  the  half  of  the  ice,  computed 
upon  the  basis  of  the  summer  value,  is  greater  than  the 
worth  of  the  whole  for  present  consumption. 

How  the  issue  matters.  —  Most  economists  still  hold  that 
the  rent  of  land  has  no  part,  as  cost,  in  determining  the  sup- 
ply and  the  price  of  the  product.  It  is,  indeed,  mainly  for 
this  reason  that  they  emphasize  the  distinction  between  land 
and  other  instrumental  goods  and  deny  that  land  is  capital. 
But  that,  in  competitive  affairs,  the  business  man's  total 
investment,  inclusive  of  land  and  franchises  and  patents, 
is  his  business  capital,  and  that  the  important  fact  for  cost 
and  for  the  fixation  of  price  is  the  fact  of  outlay  and  not 
the  particular  direction  of  this  outlay,  may  perhaps  be  made 
clearer  by  observing  the  different  ways  in  which  producers 
in  the  same  line  of  production  go  about  to  achieve  precisely 


176  THE  ECONOMICS  OF  ENTERPRISE 

similar  ends.  Of  six  farmers,  with  sulistantially  similar 
farms  ami  inheriting  or  borrowing  an  eciual  fund  of  purchas- 
ing power,  one  will  buy  more  land,  anotiier  more  machinery, 
a  third  will  hire  more  labor,  a  fourth  will  buy  more  draft 
cattle,  a  fifth  will  increase  his  herds,  a  sixth  will  enlarge  and 
improve  his  sheds  and  barns ;  but  all  will,  in  essential  simi- 
larity, be  devising  ways  of  most  gainfully  putting  product 
upon  the  market.  True,  thvro  would  b(>  room  enough  here, 
were  it  to  the  purpose,  for  technological  distinctions  between 
the  various  factors  of  production,  but  it  is  clearly  not  to  the 
purpose.  No  one  of  these  gain-seeking  outlays  is  any  more 
or  any  less  a  cost  than  any  other  —  no  one  of  the  durable  ob- 
jects purchased  less  an  item  of  capital  than  any  other. 

We  may,  then,  take  it  as  established  that,  in  any  competi- 
tive sense,  the  productivity  of  labor  or  of  wealth  is  purely  a 
question  of  controlling  income  for  an  individual ;  that  all 
durable  property  is  a  durable  source  of  income,  commands 
therefore  a  price,  and  is  capital  in  the  degree  of  its  price  ;  that, 
even  mechanically  viewed,  the  factors  of  production  are  not 
three  or  four,  but  legion ;  that  the  hires  of  these  for  produc- 
tive purposes  are  all  equally  costs,  and  are  costs  by  the  same 
test  and  title ;  that  there  are  many  cost  outlays  and  cost 
charges  other  than  those  involved  in  the  mere  hiring  or  buying 
of  material,  concrete,  industrial  equipment ;  and  that,  as  one 
out  of  a  large  number  of  costs,  must  be  reckoned  an  interest 
charge  upon  the  invested  fund  or  funds.  The  invested  capi- 
tal fund  as  an  aggregate  is  therefore  capital.  Every  source 
of  income  in  which  any  part  of  this  fund  is  invested  is  capital. 
Every  outlay  in  production  is  a  cost.  Every  cost  is  to  its 
recipient  a  distributive  share.  Rent  and  interest  are  equally 
incomes  from  capital,  are,  as  costs  of  production,  indistin- 
guishable in  their  relation  to  price,  and  are  distributive  shares 
of  the  same  rank  and  by  the  same  title. 

The  next  chapter  will  devote  itself  to  reenforcing  these  con- 
clusions, with  especial  reference  to  the  relation  of  the  rent  of 
land  to  the  costs  of  production  and  the  prices  of  goods.  It 
will  be  shoAvn  that  the  rent  of  land  is  a  cost  like  any  other, 
and  has  the  same  relation  to  price.  The  existence  of  any 
factor  of  production  for  which  a  rent  or  hire  is  paid  is  ob- 
viously not  a  reason  why  the  product  is  scarce  or  the  price 


DIFFERENT  BASIS   OF   COSTS   AND   OF  SHARES     177 

high.  The  more  of  the  factor,  the  more  of  its  product  and  the 
lower  the  price.  The  rent  of  the  land,  or  the  hire  of  any  other 
factor,  is  merely  the  competitive  expression  of  the  scarcity 
of  the  factor.  Rent  is  paid  to  the  landowner,  and  is  a  cost  to 
the  entrepreneur,  because  of  the  scarcity  of  the  land.  Any 
factor  that  commands  a  rent  commands  it  not  because  there 
is  so  much  of  the  factor,  but  because  there  is  so  little  of  it ; 
not  what  there  is  of  it,  but  what  there  is  not  of  it,  explains  the 
rent  of  it.  Every  cost  outlay  is,  then,  merely  the  guise  in 
which,  in  a  competitive  society,  the  scarcity  of  the  factor 
presents  itself  to  the  entrepreneur.  Desiring  to  control  the 
price  product  of  the  factor,  the  entrepreneur  is  compelled  to 
pay  a  rent  as  the  condition  on  which  he  may  control  the 
factor,  and,  through  the  factor,  may  control  the  product  of 
the  factor.  Cost,  therefore,  is  the  competitive  expression  of 
the  limited  supply  of  the  factor.  Thus  all  rents  or  hires  of 
productive  factors  —  as  all  pointing  back  to  the  ultimate  fact 
of  the  scarcity  of  the  factors  —  are  all  equally  costs  in  the 
entrepreneur  computation.  So  far,  then,  as  the  distinction 
between  land  and  capital  concerns  itself  with  the  attempt  to 
distinguish  land  rent  from  other  rents  in  relation  to  cost  of 
production  and  to  price,  the  distinction  has  no  basis. 


CHAPTER   XII 

RENTS    OF    INSTRUMENTS    AS    COSTS  :     LAND    RENT    AND 
COST 

Substituted  costs  in  agriculture.  —  In  agricultural  pro- 
duction, as  in  almost  all  other  lines  of  production,  there  is 
need,  as  has  already  been  noted,  for  a  considerable  variety 
of  equipment,  land  and  other.  In  some  measure,  also,  one 
sort  of  equipment  may  be  used  as  substitute  for  another. 
This  principle  of  sul^stitution  is  manifest  in  a  great  variety 
of  applications.  Just  as  the  original  qualities  of  the  soil 
may  be  exhausted  by  withholding  upkeep,  so  they  may  be 
replaced  and  renewed  by  capital  expense  ;  the  poorest  of  land 
may  be  made  into  good  land,  if  only  sufficient  capital  expense 
be  applied,  —  the  sole  question  being  whether  it  will  pay. 
And  this  question  in  turn  depends  upon  the  selling  price  of 
the  products.  And  precisely  as  machinery  may  take  the 
place  of  labor,  or  labor  of  machinery,  so  more  labor  may 
often  be  hired,  instead  of  renting  more  land  or  purchasing 
more  machinery ;  or,  again,  more  expense  for  equipment 
may  be  applied  to  a  given  holding  of  land,  instead  of  hiring 
more  labor  or  renting  more  land. 

This  is  constantly  illustrated  in  actual  farming ;  one  farmer 
rents  more  land  or  better  land,  and  thus,  through  his  larger 
rent  outlay,  excuses  himself  from  correspondingly  large 
outlays  for  machinery  or  fertilizers  or  labor ;  another  farmer 
finds  it  to  his  advantage  to  restrict  himself  in  rent  outlays 
and  to  extend  his  investment  in  the  direction  of  capital  goods 
or  labor.     All  these  outlays  are  investments  of  capital. 

But  that  at  the  margin  this  principle  of  substitution  holds. 
and  even  that  extending  transportation  or  improvements  in 
agricultural  technique  may  have  the  effect  either  to  increase 
the  land  supply  or  to  make  more  effective  the  existing  supply, 
does  not  prove  that  the  principle  of  substitution  is  indefi- 

178 


LAND  RENT  AND  COST  179 

nitely  applicable  at  no  matter  how  distant  removes  from  the 
margin  of  substitution ;  for  were  such  the  truth,  there  coukl 
be  nowhere  any  disadvantage  from  an  increase  of  capital 
expense  upon  a  fixed  supply  of  land,  or  any  loss  from  twenty 
laborers  working  with  one  loom,  or  any  reason  why  indefinite 
wagons  should  not  dispense  with  the  need  of  horses  or  drivers. 

Complementarity  versus  substitution.  —  For  it  is  clear 
that  in  the  main  the  relation  between  the  different  production 
goods  is  one  of  complementarity  and  interdependence  rather 
than  of  the  indefinite  possibility  of  substitution.  More  men 
and  more  machinery  may  make  call  for  more  land  rather 
than  for  less,  or  for  the  old  land  at  a  higher  rate  of  rental. 
Machinery  does  not  displace  men  indefinitely,  but,  under 
stable  conditions  of  technique,  calls  instead  for  men  to  fashion 
or  to  tend ;  wagons  furnish  demand  for  drivers,  ships  for 
sailors,  horses  for  drivers,  drivers  for  wagons,  and  so  on  with- 
out limit. 

Stopping  to  note,  however,  that  there  is  in  these  facts 
no  warrant  for  the  threefold  division  of  productive  factors, 
since  it  is  equally  true  that  bricklayers  furnish  a  demand  for 
hod-carriers,  carpenters  for  masons,  wagons  for  horses,  sail- 
ors for  cooks,  engines  for  cars,  rails  for  ties,  meadow  land  for 
pasture,  and  both  of  these  last  for  timber  lands,  and  so  on 
indefinitely,  we  are  nevertheless  held  to  admit  that  the  sub- 
stitution of  labor  or  machinery  for  land  cannot  go  on  in- 
definitely in  agriculture.  A  point  always  is  reached  at  which 
more  intensive  cultivation  gives  more  and  more  meager 
returns  in  product.  The  difficulty  is  ultimately  spatial. 
It  is  impossible  to  compress  agricultural  or  building  or  cli- 
matic or  scenic  aspects  of  land  into  ever  smaller  compass  and 
without  limit  of  disadvantage.  With  all  vegetable  life  a 
limited  space  means  limited  supplies  of  food,  of  light,  of  air, 
and  of  moisture.  There  is,  therefore,  an  elastic,  but  never- 
theless a  real,  limit  to  the  crop  which  may  be  derived  from 
any  one  acre  of  land.  Otherwise,  in  truth,  there  could  never 
be  any  possibility  of  land  shortage,  and  that  inevitable 
derivative  of  land  shortage,  crop  shortage,  and  therewith 
high  prices  of  products,  and  therewith  high  rent  upon  land. 
Were  it,  that  is  to  say,  always  possible  to  double  the  crop  by 


180  rilK  ECONOMICS  OF  ENTERPRISE 

merely  doubling  the  non-rent  expenses  of  production  or  even 
by  doubling,  in  non-land  directions,  the  total  expense,  land 
scarcity  could  never  set  in,  or  land  rents  emerge  as  derivative 
from  this  scarcity. 

Population,  land,  and  product.  —  But  with  our  present 
knowledge  of  the  sources  of  food  and  with  our  present  com- 
mand of  the  technique  of  agriculture,  it  is  clear  enough  that 
increasing  population  must  tend  to  exert  an  ever  harder 
and  harder  pressure  upon  the  resources  of  the  land.  Thus, 
from  a  social  point  of  view,  and  purely  as  a  forecast  of  human 
welfare,  Malthus  and  his  successors  long  since  made  it  clear 
that,  in  the  land  aspect,  the  prospects  of  the  human  race 
are  discouraging.  With  increasing  numbers,  human  beings 
must  find  the  food  problem  progressively  a  more  serious 
problem  ;  in  its  effect  upon  per  capita  production  of  commod- 
ities, overcrowded  land  is  the  same  thing  as  poor  land. 

Population  —  rent  and  wages.  —  These  same  facts,  looked 
at  in  their  competitive  and  price  significance,  have  larger 
meanings  than  Malthus  saw,  or  was  interested  to  see.  They 
mean,  namely,  that  with  an  increasing  population,  and  an 
increasing  relative  scarcity  of  the  products  especially  de- 
rived from  land,  and  with  increasing  relative  plenty  of  the 
products  which  are  mainly  derived  from  labor  or  from  in- 
struments of  production  other  than  land,  the  relative  prices 
of  agricultural  products  must  move  upward,  and  that  rent 
upon  land  must  gradually  and  constantly  advance.  And 
these  same  facts,  treated  in  their  distributive  emphasis, 
would  assert  that  as,  with  increasing  population,  there  falls 
out,  per  capita,  a  smaller  product  in  society  to  be  divided, 
there  goes  to  the  landlords  a  larger  and  larger  proportion  of 
this  more  and  more  tragically  inadequate  total.  The  land- 
lords gain  by  the  general  ill-fortune.  Those  classes  disin- 
herited of  land  are  doomed  to  a  double  and  compounded 
pressure  of  adversity.  The  land  famine  smites  them  with 
both  edges  of  its  sword. 

When  a  discussion  comes  to  busy  itself  mostly  with  conjecture 
and  prophecy,  the  optimists  are  prompt  to  claim  their  innings. 
Surely  other  things  remaining  the  same,  all  these  disasters  would 


LAND  RENT  AND  COST  181 

attach.  But  other  things  will  not  remain  the  same ;  for  if  there 
is  a  law  of  diminishing  return,  there  is  also  what  is  sometimes  inac- 
curately called  the  law  of  increasing  return.  If,  with  relative  land 
famine,  a  larger  share  of  the  productive  energies  at  human  disposal 
must  be  applied  to  the  land,  it  may  also  be  true  that,  with  improving 
methods  and  processes  in  manufactures,  humanity  can  spare  for  the 
land  a  larger  share  of  its  productive  energies.  Who  knows  that 
progress  in  one  direction  may  not  more  than  make  good  the  deficit 
in  the  other  direction? 

Rent  and  the  methods  of  culture.  —  Strictly,  however,  our  busi- 
ness is  not  with  prophecy,  or  with  history,  or  with  social  appraisals, 
but  with  the  explanation  of  the  present  payment  of  rent  by  com- 
peting operators,  and  with  the  relation  of  land  and  land  rent  to  the 
prices  of  products.  Fortunately,  those  aspects  of  the  land  question 
already  examined  furnish  us  with  some  principles  and  analyses 
serviceable  in  the  problem  of  current  competitive  price. 

Precisely  as  society  in  the  aggregate  is  disadvantaged  in 
its  supplies  of  products  by  a  bad  proportion  between  its 
different  factors  of  production,  so  the  individual  farmer 
finds  that  his  land  equipment  must  be  in  proper  proportion 
to  his  other  equipment.  When  land  is  dear  and  rents  are 
high,  the  farmer  is  likely  to  cultivate  a  smaller  area,  and  to 
employ  more  labor  and  machines  and  fertilizers  per  acre 
cultivated,  —  that  is,  farming  becomes  more  intensive. 

This  same  fact  may  be  put  in  another  way :  The  rents  and  the 
prices  of  land  could  not  be  high  were  the  land  supply  not  limited, 
the  supply  of  products  thereby  restricted,  and,  therefore,  the  prices 
of  products  high.  But  when  land  is  to  be  had  only  at  high  cost,  the 
number  of  acres  cultivated  per  man  must  be  small,  and  the  applica- 
tion of  macliines  and  fertilizers  relatively  great.  Land  rents  are  so 
high  as  to  prohibit  a  lavish  use  of  it ;  it  must  be  economized ;  so  the 
non-land  factors  of  production  are  called  upon  to  serve  in  larger 
measure  instead  of  further  land.  A  less  intensive  method  of  culti- 
vation would  involve  a  bad  proportion  of  factors  —  too  much  land 
in  view  of  its  rent. 

But  where  land  is  plenty  and  cheap,  extensive  cultivation 
gives  the  better  results.  The  farmer  uses  more  land  pre- 
cisely because  it  is  cheap.  The  generous  employment  of  it 
offers  the  less  expensive  method   of  putting  the   product 


182  THE  ECONOMICS  OF  ENTERPRISE 

upon  the  market.  Farms  a^'orap;e  much  larger  in  America 
than  in  Europe,  and  in  EuroiK'  than  in  Japan  ^ — in  Japan 
2h  acres. 

And  not  merely  this :  as  prices  of  products  are  greater 
and  rents  are  higher,  the  farmer  finds  it  to  his  advantage  to 
cultivate  lands  which,  at  a  lower  price  for  his  products,  he 
could  not  wisely  cultivate;  with  the  earlier  low  prices,  the 
product  left  no  surplus  above  the  non-rent  costs  of  produc- 
tion. Now  with  higher  prices,  a  surplus  is  possible,  and 
the  land  is,  worth  paying  rent  for.  It  may,  indeed,  be  better 
to  pay  the  rent  for  this  poor  land  than  to  hire  a  better  grade 
of  land  with  its  correspondingly  smaller  outlays  for  labor  and 
fertilizers  and  machinery. 

But  even  so,  these  higher  prices  that  are  making  it  gain- 
ful to  open  up  new  lands,  are  also  making  gainful  the  more 
and  more  intensive  cultivation  of  the  better  grades  of  land. 
Thus,  there  are  two  sorts  of  marginal  cultivation  of  land, 
(1)  at  the  extensive  margin  —  upon  lands  barely  indemni- 
fying in  their  product  the  non-rent  expenses  of  cultivation ; 
and  (2)  at  the  intensive  margin  —  the  point  at  which,  upon 
supra-marginal  lands,  further  cost  is  barely  indemnified  in 
the  price  of  the  further  product. 

Price  and  marginal  production.  —  The  market  price  of 
any  product  tends  evidently  to  be  commensurate  with  the 
cost  of  production  at  either  of  these  margins,  and  commen- 
surate also  at  the  same  time  with  the  marginal  costs  of 
production  of  those  other  items  of  product  where  rent 
enters  into  the  cost.  The  market  price  tends  indeed  to  be 
commensurate  with  marginal  costs  of  production  wherever 
these  costs  take  place.  This,  however,  is  not  at  all  to  say 
that  the  marginal  cost  of  production  determines  the  price; 
as  well  declare  —  and  probably  better  —  that  it  is  the  price 
that  determines  the  marginal  cost.  Neither  statement,  how- 
ever, is  safe ;  it  is  the  total  supply  over  against  the  total 
demand  that  determines  the  price. 

All  rents  equally  costs.  —  It  should  now  be  evident  that 
rents  are  attached  to  lands,  through  the  bidding  of  entre- 
preneur cultivators,  upon  precisely  the  same  basis,  and  for 
the  same  reason,  and  by  the  same  process,  that  wages  are 


LAND  RENT  AND  COST  183 

paid  for  labor,  or  that  other  rents  are  paid  for  machinery; 
and  that  market  prices  are  attached  to  land  upon  pre- 
cisely the  same  basis,  and  for  the  same  reasons,  and  by  the 
same  processes,  as  market  prices  upon  machinery.  Good 
lands  command  higher  rents  than  poorer  lands,  just  as  better 
laborers  get  higher  wages  than  poorer  laborers.  This  is 
merely  one  further  illustration  of  the  principle  that  any 
means  of  gain  is  paid  for  because  of  the  additional  return 
that  it  promises.  Land  rents  represent  the  differential  in 
market  rental  of  each  grade  or  piece  of  land  above  the  land 
barely  worth  using  without  rent.  But  so  is  every  wage 
or  other  hire  nothing  more  or  other  than  this  same  differential 
above  nothing. 

And  note  again  that,  as  has  before  been  sufficiently  shown,  it  is 
one  thing  to  say  that  all  these  different  hires  are  paid  because  of  the 
promise  of  gainful  service  to  the  entrepreneur  in  placing  his  results 
upon  the  market,  and  another  thing  to  say  that  these  hires  are  paid 
as  the  precise  equivalent  of  the  contribution  to  the  market  price  of 
the  result.  And  it  is  still  another  —  and  an  even  less  justifiable 
thing  —  to  say  that  the  service  for  the  price  gain  of  the  employer  is 
necessarily  a  service  to  society. 

Ricardian  doctrine  examined.  —  The  foregoing  analysis 
coincides  in  the  main  with  the  generally  accepted  theory  of 
land  rent  — ■  the  Ricardian  theory  —  so  far  as  the  amount 
of  the  rent  payment  and  the  method  of  its  determination  are 
concerned.  The  points  of  divergence  lie  further  on :  in 
the  denial  that  there  is  anything  in  the  theory  of  the  deter- 
mination of  rent  that  does  not  equally  apply  to  the  remunera- 
tion of  all  other  means  of  achieving  gain ;  in  the  insistence 
that  machines  receive  rent  and  that  labor  receives  wages 
upon  the  same  basis  of  principle  on  which  rent  is  awarded 
to  land ;  that  the  relation  of  land  rent  to  cost  of  pro- 
duction, to  supply,  and  to  market  price,  is  in  no  respect 
different  from  the  relation  of  machine  rents  and  wages  to 
cost,  to  supply,  and  to  price ;  that  there  are  intensive  and 
extensive  machine  margins  precisely  as  there  are  intensive 
and  extensive  land  margins  ;  that  marginality  in  cost  of  pro- 
duction is  a  category  of  persons,  and  of  things  only  as  related 


1st  THE  ECONOMICS  OF  EXTERPRISE 

to  persons ;  that  the  marginal  producer  may  as  well  be  on 
gooil  land  at  high  rent  as  on  poor  land  at  no  rent ;  that  the 
costs  are  neither  lower  nor  higlier  by  virtue  of  the  land  being 
better  or  poorer  ;  that  rent  is  simply  a  cost  that  is  submitted 
to  as  the  compensation  competitively  imposed  for  the  better- 
ness  of  the  better  lantls ;  and  that  it  is  precisely  this  fact  of 
rent  that  cancels  the  inequalities  in  cost  that  otherwise  must 
attend  the  differences  among  lands  in  their  serviceability 
for  gain. 

Fertility  and  position.  —  In  the  main,  the  Ricardian  theory  con- 
cerns itself  with  agricultural  and  not  with  urban  rents:  With  agri- 
cultural lands  of  different  grades,  the  best  will  be  occupied  first.  If 
there  is  plenty  of  this  best  grade,  and  as  long  as  there  is  this  plenty, 
land  rent  cannot  emerge,  because  rather  tlian  pay  rent  upon  some 
of  tlie  lands  of  tliis  best  grade,  cultivators  ^\'ill  simply  take  up  other 
of  these  lands  still  vacant.  Lands  of  this  high  grade  of  desirability 
may,  however,  hold  this  rank  through  cither  one  of  two  aspects  of 
advantage :  lands  equall}^  accessible  to  the  market  may  be  of  un- 
equal fertility ;  lands  of  equal  fertility  may  be  unequally  accessible 
to  the  market.  IlUnois  lands,  for  example,  are  probably  better, 
climatic  conditions  being  taken  into  account,  than  Nebraska  lands. 
This  explains  in  part  the  higher  rents  and  the  derivative  higher 
values  of  Illinois  lands.  But  it  does  not  entirely  explain  them. 
Illinois  lands  pay  smaller  transportation  charges.  A  bushel  of 
Illinois  wheat  or  corn,  or  a  pound  of  Illinois  beef  or  pork,  affords 
the  larger  balance  in  selling  price  above  the  freight.  That  is  to 
say,  there  are  fertiUty  rents  and  position  rents.  Of  two  tracts 
of  land,  one  may  enjoy  one  advantage  in  a  degree  to  offset  or 
overbalance  its  inferiority  in  the  other  respect.  Thus  it  is  possible 
for  near-by  lands  to  rank  in  rent  and  in  price  below  more  distant 
lands.  If,  as  all  lands  were  less  desirable  in  point  of  distance, 
they  were  in  precisely  equal  degree  better  in  fertility,  all  lands 
would  be  equally  desirable,  and,  therefore,  all  be  rentless  — 
assuming  all  the  while  that  there  remained  unoccupied  lands. 

But  take  it  now  —  foUo^vang  still  the  Ricardian  analysis  —  that  a 
point  has  been  reached  where  it  becomes  worth  while  to  cultivate 
lands  less  desirable  than  the  best  grade.  This  condition  will  ordi- 
narily be  due  to  increasing  demand  for  product,  —  say  through  in- 
creasing population,  —  but  might  conceivably  be  due  to  the  waning 
advantages  of  alternative  industries.  At  any  rate,  if  the  prices  on 
agricultural  products  are  high  enough  to  justify  the  extension  of 


LAND  RENT  AND  COST  185 

cultivation  to  the  poorer  lands,  these  prices  must  also  be  high  enough 
to  attach  a  rent  to  the  better  lands.  Competition  imposes  these  rents  ; 
in  fact,  these  rents,  so  due  to  the  difference  in  objective  desirability 
of  land,  are  precisely  the  burdens  which  cancel  this  balance  of  desir- 
ability, and  place  all  upon  an  equal  market  footing.  One  tenant, 
truly,  finds  it  to  his  advantage  to  submit  to  paying  rent  upon  the 
better  land,  while  another  tenant  achieves  his  largest  renter's  sur- 
plus through  the  cultivating  of  the  poorer  and  cheaper :  but  this  is  a 
difference  of  advantage  attaching  to  the  difference  in  men,  and  in 
their  adaptations.  Looked  at  from  an  impersonal  —  and  therefore 
a  vague  and  average  —  point  of  view,  the  different  grades  of  land 
command  remunerations  commensurate  with  the  objective  ad- 
vantages afforded. 

But  the  Ricardian  analysis  recognizes  that  it  is  only  the  lure  of 
higher  prices  that  induces  this  widening  of  the  cultivated  area  — 
this  movement  of  cultivation  to  a  lower  land  margin  in  the  exten- 
sive sense.  For  precisely  the  same  reason  these  higher  prices  induce 
a  more  intensive  cultivation  of  the  better  lands.  Each  tract  of 
land  has,  in  fact,  its  own  intensive  margin,  the  point  to  which  it  is 
barely  worth  while  to  go  in  the  application  of  further  expense.  This 
is  the  point  where  the  further  increment  in  price  product  is  at 
equilibrium  against  the  further  expense  of  achieving  that  product. 
In  intensive  cultivation,  the  process  is  not  one  of  opening  up  new 
land,  but  of  opening  up  new  productive  powers  of  the  land  already 
in  use.  So,  with  falling  prices,  there  is  not  only  an  extensive 
abandonment  but  an  intensive  abandonment  —  a  partial  abandon- 
ment —  not  an  exodus  truly,  in  the  covered-wagon  sense,  but  a 
diminished  stress  of  investment,  a  lessening  of  pressure,  a  failure 
to  appeal  to  those  productive  powers  of  the  land  most  niggardly  in 
their  response  to  capital  outlay. 

In  truth,  that  rent  attach  to  any  tract  of  land  is  conditioned  upon 
the  carrying  of  cultivation  upon  it  to  an  intensive  margin.  The 
marginal  bushel  of  product  carries  no  rent  with  it.  Exclusive  of 
rent,  it  costs  to  get  it  all  that  it  is  worth.  It  is  the  rest  of  the  crop 
that  earns  the  rent,  the  more  per  bushel  as  each  bushel  is  more 
distant  from  the  intensive  margin  of  disappearing  gain.  The  rent, 
indeed,  is  paid  for  the  opportunity  to  grow  the  supra-marginal 
bushels.  Every  advance  in  price  establishes  this  opportunity  as  of 
greater  worth  for  each  supra-marginal  bushel,  and  pushes  cultiva- 
tion down  to  another  and  more  expensive  marginal  bushel.  Mean- 
while, the  extensive  margin,  the  area  margin,  is  widening  to  correspond 
with  the  deepening  of  the  intensive  margin.  Therewith,  upon  the 
old  extensive  margin,  there  now  attaches  an  intensive  margin  — 


180  THE  ECONOMICS  OF  ENTERPRISE 

and  ronts  emerge.     Such  is  essentially  the  Ricardian  theorj'-  of  land 
liiiv. 

Rent  and  price.  —  Hut  what,  then,  is  the  relation  of  land  rents 
to  the  prices  of  the  products  of  land?  Is  corn  high  because  rent  is 
paid,  or  was  Ricardo  rights  in  in.sisting  that  rent  is  paid  because  corn 
is  high?  What  is  the  coiniection  —  which  is  cause  and  which  effect? 
The  Ricardian  iloctrine  tlenied,  and  many  of  its  nunuM-ous  adherents 
still  deny,  that  rent  can  have  any  share  as  cost  in  fixing  the  price 
of  products.  This  denial  was,  indeed,  as  we  have  alreadj''  seen,  a 
necessary  doctrine  in  the  Ricardian  system  of  theory.  If  prices  of 
products  were  to  be  made  proportional  either  to  the  labor  applied 
in  production  or  to  the  wages  expended,  the  products  must  have 
their  prices  determined  wliere  nothing  but  labor  or  wages  entered 
into  the  costs.  So  it  was  argued  that  the  price  is  determined  by  the 
cost  of  production  on  marginal  land,  land  which  does  not  pay  rent. 
It  was,  indeed,  both  admitted  and  argued  that  the  costs  are  less  on  the 
better  lands,  but  the  prices,  it  was  said,  are  not  determined  on  these 
better  lands,  but  on  the  marginal  lands.  The  rents  paid  for  these 
better  lands  were  interpreted  as  surpluses  above  the  cost  of  pro- 
duction on  these  lands,  or  as  saved  cost,  but,  in  any  case,  as  results  of 
price  and  not  causes  of  price.  These  positions  in  support  of  the 
labor-cost  theory  of  price  cUctated  also  the  taking  of  some  further 
positions,  (1)  the  derivation  of  all  capital  from  labor  —  a  doctrine 
wliich  does  not  immediately  concern  us  —  and  (2)  the  distinction  of 
land  from  capital.  For  obviously,  if  land  could  not  be  cUstinguished 
from  capital,  land  rents,  as  related  to  price,  could  not  be  distinguished 
from  machine  rents  or  from  interest  generally. 

But  the  Ricardian  doctrine  had  hardly  been  stated,  when  it  met 
the  need  of  extension  or  of  modification.  For  what  would  become 
of  the  doctrine,  in  case  there  were  no  marginal  land?  This  query 
finally  divided  the  Ricarchan  discipleship  into  several  dissentient 
camps.  The  disciples  of  the  stricter  discipline  experienced  no 
perplexity ;  there  would  still  be  a  marginal  production  on  the  non- 
marginal  land  —  a  cultivation  at  the  intensive  margin.  But  what, 
then,  of  the  minimum  rents  paid  for  even  these  poorest  lands? 
Mostly  it  was  answered  that  these,  like  the  rents  originally  discussed 
by  Ricardo,  had  no  share  in  fixing  price  ;  that  thej^  were  also  differ- 
entials above  the  margin  of  production,  saved  costs,  equally  with  the 
differentials  above  the  extensive  margin.  This  widening  of  the 
issue  brought,  however,  still  further  dissension.  For  if  all  land  Hires 
were  excluded  from  cost,  through  an  appeal  to  the  intensive  margin, 


LAND  RENT  AND  COST  187 

must  not  machine  hires  make  the  same  amazing  disappearance? 
And  if  these  minimum  rents  common  to  all  agricultural  production, 
the  dollar  rents,  were  included,  would  not  the  rents  on  the  ten-dollar 
lands  ten  times  as  good  have  also  to  be  included?  The  "  higher 
synthesis  "  that  was  needed  arrived  with  the  discovery  by  the  later 
Ricardians  that  not  all  of  the  rents  were  to  be  excluded  from  cost, 
nor  all  included ;  that  only  those  should  be  included  which  the  lands 
would  earn  in  that  best  alternative  employment  in  which  they  might 
have  been  used  —  but  actually  were  not  used  —  and  that  those 
must  be  excluded  which  were  a  surplus  earning  power  above  the 
alternative  use ;  only,  therefore,  when  the  lands  were  good  for 
nothing  else  would  all  of  the  rent  disappear  from  cost  as  an  influence 
afi'ecting  prices ;  only  in  this  remnant  was  the  original  Ricardian 
principle  still  acceptable. 

Precisely  what,  in  this  neo-Ricardian  theory,  will  finally  become 
of  the  distinction  between  land  and  capital,  now  that  the  distinction 
between  rent  and  interest  has  broken  down,  —  part  of  the  rent 
now  entering  into  price  —  we  may  not  at  this  point  too  curiously 
inquire ;  our  present  task  is  to  examine  these  various  classical  or 
neo-classical  methods  of  relating  rent  to  cost  of  production.  On 
which  side  is  really  the  causation  —  with  prices  or  with  rents  ?  Or 
possibly  is  the  question  rather  one  of  relative  emphasis  —  the  one 
more  cause  than  effect,  the  other  more  effect  than  cause  ? 

The  actual  relation.  —  The  truth  is,  as  we  shall  see,  and 
as  in  other  connections  we  have  already  seen,  that  the  cause 
of  the  price  is  not  ultimately  with  the  rent,  nor  is  the  cause 
of  the  rent  ultimately  with  the  price.  The  scarcity  of  the 
product  explains  —  on  the  cost  side  —  the  price  of  the  prod- 
uct. The  relative  scarcity  of  the  product  is  in  turn  explained 
through  the  relatively  limited  supply  of  its  sources  of  pro- 
duction. The  rent  of  the  land,  equally  with  the  price  of  its 
product,  finds  its  ultimate  cause  —  so  far  as  the  supply  is 
concerned  —  in  the  limited  supply  of  land.  But  it  is  none 
the  less  true,  that,  looked  at  from  the  point  of  view  of  the 
entrepreneur,  the  hires  paid  by  him  for  the  different  factors 
are  costs  to  him,  and  as  costs,  are  effective  to  limit  his  out- 
put of  product.  These  costs  are,  in  fact,  the  form  in  which, 
for  him,  the  scarcity  of  factors  expresses  itself.  Thus, 
whatever  is  the  hire  paid  by  him,  for  whatever  employed 
item  or  thing,  that  hire  is  a  cost.     Nor  does  it  matter  whether 


1S8  THE  ECONOMICS  OF  ENTERPIUSE 

the  employed  thing  could  or  could  not  be  used  in  some  other 
industiy,  or  used  by  some  other  employer  in  the  same  in- 
dustry, excepting  so  far  as  the  different  possibilities  of  em- 
ployment may  bear  upon  the  payment  necessary  to  command 
the  service  in  any  given  use  —  only  so  far,  that  is,  as  the 
limitation  affects  the  supply  for  the  particular  use  in  question. 

Still  other  rent-cost  fallacies.  —  This  ought,  it  would  seem,  to  go 
without  saying ;  nevertheless,  stninge  doctrines,  as  we  have  seen,  and 
not  a  few  of  them,  have  made  their  appearance  in  political  economy  in 
the  effort  to  follow  out  the  dogma  that  rent  is  no  part  of  cost,  and 
in  the  attempt  to  fit  this  doctrine  somehow  into  the  facts  of  business. 

There  are,  in  truth,  various  sorts  of  differentials  in  the  payment 
for  the  use  of  land,  each  of  which  has,  in  its  turn,  been  regarded  as 
that  particular  sort  of  rent  which  does  not  influence  price.  Sup- 
pose, for  illustration,  that  there  is  a  tract  of  land  worth  100  of  rent 
if  used  in  tobacco  culture,  but  only  worth  50  in  its  next  best  use ; 
that  the  poorest  tobacco  land  in  cultivation  earns  25 ;  and  that  the 
poorest  land  in  cultivation  for  any  purpose  earns  10.  Shall  it  be 
said  that  only  the  50  of  displaced  product  is  a  price-determining 
cost,  the  extra  50  remaining  a  price-determined  surplus?  Or  shall 
the  25  of  rent  paid  for  the  poorest  tobacco  land  be  taken  as  cost  and 
75  stand  as  surplus?  or  only  10  remain  for  cost  and  90  go  for 
surplus?     Or  shall  nothing  remain  for  cost? 

If,  for  example,  it  were  true  that  all  land,  even  the  poorest,  were 
in  cultivation,  and  at  an  appreciable  rent  for  even  this  poorest,  it 
could  hardly  be  urged  that  not  even  this  minimum  rent  could  form  a 
part  of  cost.  Or  take  products  like  champagne  or  tobacco  or 
garden  truck,  commodities  produced  upon  those  high  rent  lands 
which  are  commonly  of  a  sort  to  command  good  rents  for  other  pur- 
poses :  shall  it  be  said  that  none  of  these  rents,  or  only  those  on  the 
poorest  of  these  lands,  can  rank  as  among  the  costs  that  influence 
price?  And  how  exclude  any ,  if  not  all ?  If  four  of  rent  upon  one 
acre  has  no  part  in  price  determination,  why  should  the  rent  of 
two  acres  worth  two  each  per  acre  have  anything  more  to  do  with  it? 
If  the  wages  of  a  two-dollar  man  are  included  in  cost,  why  not  also 
the  extra  two  dollars  paid  to  a  man  twice  as  good?  Clearly  no  one 
of  those  outlays  can  be  excluded  from  the  cost  that  determines  price 
without  excluding  all. 

Alternative  rent  as  cost.  —  But  perhaps  a  stronger  case  may  be 
made  for  including  within  the  rent-cost  of  one  commodity,  say  to- 
bacco, only  such  part  of  the  tobacco  rent  as  the  land  could  be  made  to 


LAND  RENT  AND  COST  189 

earn,  if  employed  in  the  production  of  its  next  best  alternative  crop. 
This  view,  as  we  have  seen,  would  be  valid  for  Crusoe  or  for  a  col- 
lectivist  economy  ;  only  to  the  degree  that  one  item  of  land  was  im- 
portant in  some  other  use  could  it  be  regarded  as  furnishing  a  resist- 
ance against  any  particular  use.  But  does  this  same  analysis  hold 
for  competitive  production?  Will  it  do  to  say  that  the  cultivator's 
cost  is  not  what  he  does  pay,  but  what  he  would  pay  if  he  paid  some- 
thing indefinitely,  and  perhaps  unknowably,  less?  Would  it  do  to 
include  as  a  wage  cost,  not  what  the  laborer  actually  commands  in 
the  given  employment,  but  some  smaller  sum  that  he  might  com- 
mand in  some  other  employment  ?  Does  the  premium  upon  special- 
ized skill  fall  out  of  cost?  If  so,  all  competitive  computations  of 
cost  become  sheer  nonsense. 

But,  strangely  enough,  there  is  authority  in  plenty  for  this 
view.^ 

John  Stuart  Mill,  for  example,  writes  that  "  when  land  capable  of 
yielding  rent  in  agriculture  is  applied  to  some  other  purpose,  the 
rent  which  it  would  have  yielded  is  an  element  in  the  cost  of  produc- 
tion of  the  commodity  wliich  it  is  employed  to  produce." 

Jevons,  objecting,  says:  "  Here  Mill  edges  in  as  an  exceptional 
case  that  which  proves  to  be  the  rule.  ...  If  land  which  has 
been  getting  £2  per  acre  rent  as  pasture  be  plowed  up  and  used  for 
raising  wheat,  will  not  the  £2  per  acre  be  debited  against  the  expense 
of  the  production  of  wheat?  " 

And  Jevons  commendably  carries  his  logic  to  its  ultimate  collapse : 
"  When  labor  is  turned  from  one  employment  to  another,  the  wages 
it  would  otherwise  have  yielded  must  be  debited  to  the  expense  of  the 
new  product." 

But  perhaps  Patten's  manner  of  statement  brings  out  the  issue 
most  clearly :  "If  the  marginal  land  used  for  gardening  will  yield 
a  rent  for  wheat,  the  value  of  the  marginal  produce  of  garden  prod- 
ucts must  equal  the  cost  of  the  labor  employed  plus  the  cost  of  the 
land  when  used  for  wheat." 

1  J.  S.  Mill,  Principles,  Book  III,  Chap.  VI ;  Jevons,  Theory  of 
Political  Economy,  Preface,  pp.  liii,  liv ;  Patten,  Theory  of  Dy- 
namic Economics,  p.  78 ;  Hobson,  Economics  of  Distribution,  pp. 
121-125 ;  Maefarlane,  Value  and  Distribution,  pp.  130-135 ;  and 
A.  S.  Johnson,  Rent  in  Modern  Economic  Theory,  pp.  78-82,  are 
among  the  different  supporters  of  the  affirmative ;  see  Marshall, 
Principles,  for  the  most  authoritative  exposition  of  the  negative 
argument ;  also,  A.  M.  Hyde,  Journal  of  Political  Economy,  Vol. 
VI,  No.  3  (June,  1898). 


190  THE  ECONOMICS  OF  ENTERPRISE 

Surely  the  product  must  at  least  equal  in  value  the  labor  wage  and 
the  wheat  rent.  But  it  nuist  more  than  include  the  wheat  rent ; 
it  must  include  tlie  rent  for  the  .garden  use,  wliich  has,  by  assump- 
tion, been  imjiortant  enough  to  (hsplace  the  wheat  use. 

The  error  in  the  half-truth.  —  But  there  is  nevertheless,  as 
has  already  been  indicated,  some  saving  grace  of  truth  in 
this  doctrine  that  only  such  rents  as  could  be  earned  in  the 
displaced  use  are  costs  in  the  actual  use.  An  influence  im- 
portant for  the  price  of  wheat,  and  an  influence  much  more 
nearly  fundamental  than  mere  entrepreneur  outlay,  is  vaguely 
in  the  background  of  the  thought.  Still,  it  is  not  the  dis- 
placed corn  rent  that  makes  either  the  prices  of  wdieat  or  the 
rents  of  wheat  land  higher,  nor  is  it  the  land  which  might 
have  been  used  for  corn,  but  instead  was  used  for  wheat, 
that  makes  wheat  prices  and  wheat  rents  higher  —  for  pre- 
cisely the  contrary  is  the  fact  —  but  it  is  the  limitation  upon 
the  supply  of  wheat  lands  by  virtue,  among  other  causes,  of 
the  use  for  the  growing  of  corn,  that  makes  the  supply  of 
wheat  smaller,  thereby  the  prices  higher,  and  thereby  again 
the  wheat  rents  higher. 

And  once  more  be  it  repeated  that  neither  rent  nor  any 
other  entrepreneur  cost  is  an  ultimate  cause  of  price.  Rent 
in  any  line  of  production  is  merely  the  entrepreneur  expres- 
sion of  the  limited  quantity  of  agents  accessible  for  that 
industry.  But  in  principle  all  this  holds  equally  of  wages 
and  of  interest  as  costs.  The  relative  scarcity  of  the  pro- 
ductive factor  renders  the  products  relatively  scarce,  thereby 
the  prices  high,  thereby  the  remuneration  of  the  factor  high. 
The  high  remuneration  is  cost,  in  the  sense  of  an  influence 
limiting  supply,  only  as,  under  entrepreneur  production,  it 
is  the  result  and  the  expression  of  a  relatively  limited  supply 
of  agents. 

Cost  and  profit  as  distributive  shares.  —  The  argument 
thus  far  sums  up  in  the  doctrine  that  every  outlay  in  produc- 
tion is  a  cost  and  every  cost  outlay  a  distributive  share. 
It  must,  however,  be  noted  that  profit  as  cost  does  not  pre- 
cisely coincide  with  profit  as  distributive  share.  Profit 
is  not  an  outlay  but  a  remainder.     Only  such  part  of  it  as 


LAND  RENT  AND  COST  191 

is  necessary  to  hold  the  producer  in  the  given  occupation, 
or  at  the  given  aggregate  of  product  —  only  the  necessary 
profit  —  functions  as  cost.  The  balance  is  a  surplus  above 
cost.  In  this  one  respect  distributive  shares  and  costs  do 
not  necessarily  coincide  —  coincide,  in  fact,  only  for  the 
marginal  producer  and  for  his  marginal  product. 

But  it  still  holds  true  that  any  instrument,  or  agent,  or  right,  or 
opportunity,  is  a  basis  of  cost  to  its  employer  to  the  extent  of  the 
hire  paid,  and  to  the  extent  also  of  such  surplus  above  the  hire  as  the 
instrument  or  agent  could  be  made  to  yield  the  employer  in  some 
alternative  use.  If  the  actual  renter  at  100  is  conscious  that  he 
could,  in  another  line  of  production,  make  the  land  count  him  for  102 
of  return,  the  while  that  it  is  actually  paying  him  103  in  wheat,  he 
must  compute,  against  its  actual  productivity  of  103,  a  cost  not  of 
100,  the  rent  outlay,  but  of  102,  the  foregone  opportunity.  His 
cost,  so  far  as  it  is  a  land  cost,  is  in  his  best  foregone  alternative ; 
in  the  case  supposed,  this  best  alternative  was  not  to  keep  his 
money  in  his  pocket  but  to  invest  it  in  another  line  of  production. 
The  price  necessary  to  induce  the  production  of  the  wheat  was  not, 
in  point  of  land  cost,  100  but  102.  In  the  producer's  computation  of 
costs,  these  opportunity  differentials,  however,  are  commonly  in- 
cluded in  his  total  of  necessary  profit  rather  than  as  attached  to  the 
particular  instruments  or  agents.     (See  Chap.  VI.) 

The  place  of  cost  in  theory.  —  Cost,  that  is  to  say,  is 
purely  an  entrepreneur  reckoning.  It  is  concerned  with 
what  the  entrepreneur  has  to  pay  or  forego,  and  not  with 
the  explanation  of  why  he  has  to  pay  or  forego  it,  whether 
because  of  the  opportunities  in  some  other  industry  or  of 
the  demands  of  competitors  in  the  same  industry.  The 
entrepreneur  knows  what  hires  the  actual  employment  forces 
him  to  pay  in  view  of  the  restricted  supply  of  instruments 
or  agents.  But  he  cannot  know,  and  he  need  not  care,  what 
hires  the  agents  or  instruments  might  demand  in  some  other 
employment.  He  is  not,  as  entrepreneur  —  but  only  as 
economist  —  concerned  with  the  ultimate  causes  of  his 
costs.  It  is  not  to  his  purpose  to  ask  whether  the  scarcity 
of  labor  is  due  to  the  painfulness  or  the  ill-repute  of  the 
occupation,  or  to  the  shortage  of  natural  ability,  or  to  the 
laziness  of  human  beings,  or  to  the  lure  of  recreation,  or  to 


102  THE  ECONOMICS  OF  ENTERPRISE 

the  alternative  oponinois  for  hired  labor.  Nor  is  it  more  to 
his  purpose  to  invest i<2;ate  \vh(>tiu>r  his  rent  outlays  are  due 
to  the  original  shortage  of  land  adaptcnl  to  his  uses,  or  to  the 
restricted  supply  which  the  requirements  of  other  indus- 
tries have  brought  about.  He  may  find  it  expensive  to  ob- 
tain diamonds  for  the  cutting  of  glass,  either  because  there 
are  few  diamonds  anyway,  or  because  what  there;  are  are 
so  hard  to  find,  or  because  so  many  are  being  worn  as  orna- 
ments. In  any  case  they  are  for  him  expensive  to  get. 
Cost  to  the  individual  entrepreneur,  that  is  to  say,  is  not  a 
fundamental  explanation  of  anything ;  it  assumes  prices 
upon  instrumental  facts  as  a  step  toward  explaining  price. 
Nor  does  the  aggregate  activity  of  entrepreneurs  explain 
the  cost  conditions  facing  each,  unless  and  until  the  great 
underlying  facts  of  human  wants  and  capacities,  and  of  in- 
strumental equipment  and  opportunity,  are  included  in 
the  survey. 

The  influences  behind  costs.  —  The  entrepreneur's  analysis 
takes  as  definitive  and  ultimate  the  actuallj'  existing  total 
situation,  inclusive  of  human  needs  and  productive  powers 
and  of  all  the  existing  supplies  and  existing  limitations  of 
equipment  and  opportunity  and  institutions,  —  and  all  of 
this  irrespective  of  how  far  the  situation  is  due  to  an  original 
bounty  or  to  an  original  inadequacy,  and  irrespective  of 
whether  human  activity  has  in  the  past  added  or  subtracted 
relevant  elements,  aspects,  or  facts.  Fundamentally,  how- 
ever, not  the  outlays  for  productive  facts,  or  these  same  out- 
lays regarded  as  incomes,  but  the  scarcity  of  these  productive 
facts  relatively  to  the  human  need,  is  responsible  for  the 
emergence  of  scarcity  of  products  an^'where  and  for  the 
relative  scarcity  of  products  which  underlies  and  explains 
exchange  relations.  But  the  entrepreneur  is  not  concerned 
with  fundamentals. 

Nevertheless,  the  inadequacy  of  the  general  equipment 
does  not  explain  the  market  price  of  any  -particular  line  of 
products  or  the  exchange  relations  between  different  classes 
of  goods.  Inside  the  general  situation  of  the  inadequacy  of 
productive  factors  must  be  worked  out  the  relative  inade- 
quacy of  productive  equipment  for  the  various  lines  of  com- 


LAND  RENT  AND  COST  193 

modities,  in  view  of  the  relative  strengtli  of  the  purchasing 
power  disposable  in  tliese  various  commodity  directions. 
Here  enter  the  influences  of  various  different  lines  of  pro- 
duction to  restrict  the  supplies  of  productive  factors  in  each 
particular  line. 

Price-determining  versus  price-determined  costs.  —  No- 
where, in  fact,  is  the  distinction  between  price-determining 
and  price-determined  costs  valid.  In  the  main,  the  value 
of  each  productive  fact  is  price-determined ;  but  as  part  of 
the  supply  of  productive  facts,  each  is,  through  its  products, 
in  its  small  measure,  a  price-affecting  influence.  So,  also, 
each  individual  activity  bearing  upon  price  or  related  to 
price,  whether,  on  the  one  hand,  the  producer's  supply  price 
or,  on  the  other  hand,  the  consumer's  disposition  to  pay  or 
not  to  pay,  is,  in  the  main,  price-determined,  because  chosen 
in  view  of  the  actual  price  situation  and  in  adaptation  to 
this  situation ;  but  each  such  activity,  as  affecting  in  its 
own  small  measure  the  aggregate  of  supply  or  of  demand, 
must  thereby  and  pro  tanto  act  as  a  price-determining  in- 
fluence. 

The  only  one,  then,  of  the  several  rent  concepts  important 
to  the  cost  analysis  is  that  of  the  actual  hire ;  but  as  oppor- 
tunity cost,  the  land  or  any  other  productive  fact  may  figure 
as  cost  at  something  vaguely  more  than  the  actual  hire 
paid. 

It  should  now  be  clear  that,  from  the  point  of  view  of  the 
aggregate  product,  it  is  important  to  society  that  it  have  not 
merely  a  generous  equipment  of  factors  of  production  but 
that  these  factors  be  in  the  right  proportions ;  that  right 
proportions  are  often  matters  of  the  technical  relations  be- 
tween factors ;  that  although,  within  limits,  more  of  one 
factor  may  atone  for  less  of  another,  there  still  are  limits  — 
the  process  of  substitution  not  being  indefinitely  applicable ; 
that  this  rightness  of  proportion  is  really  another  aspect  of 
the  impossibility  of  indefinite  substitution,  and  expresses 
merely  the  fact  that  the  effectiveness  of  each  factor  is  in  large 
degree  dependent  on  the  presence  of  other,  and  therefore 
complementary,  factors. 

It  has  also  been  suggested  —  and  will  in  later  chapters  be 


194  THE  ECONOMICS  OF  ENTERPRISE 

(lonionst rated  —  that  tlu>st'  coniplenicntary  relations  between 
factors  exist  side  by  side  with  other  rehitions  of  possible  sub- 
stitution ;  that  eai'li  of  tliese  rehitions  so  varies  with  develop- 
ing and  changing  conditions  of  techniciue,  and  varies  in  ways 
so  numerous  and  so  conii>lex  in  degree,  in  direction  and  in 
kind,  as  entirely  to  discourage  all  attempts  at  the  classifica- 
tion of  factors  on  the  basis  of  their  technological  interrela- 
tions. 

And  further ;  even  if,  in  the  social  view  and  for  technologi- 
cal purposes,  land  were  so  distinct  and  peculiar  in  its  func- 
tions as  to  permit  of  classifying  it  separately  and  of  avoiding 
the  immediate  necessity  of  indefinite  subclassification,  nothing 
would  have  been  accomplished  of  service  to  the  competitive 
analysis  or  even  relevant  to  it :  land  rent  would  remain  as 
clearly  a  cost  in  the  competitive  regime ;  the  Ricardian 
attempt  at  the  marginal  exclusion  of  rent  from  cost  would  be 
neither  the  more  nor  the  less  hopeless  ;  the  distinction  between 
rent  costs  and  other  costs  in  their  bearing  on  price  would 
remain  impossible ;  the  separation  of  land  from  capital 
would  be  equally  gratuitous ;  the  antithesis  between  price- 
determining  and  price-determined  costs  must  not  the  less  be 
abandoned  ;  the  labor  theory  or  the  wage  theory  of  price  must 
still  be  declared  a  grievous  error  involving  a  long  series  of 
associated  or  derivative  or  contributing  errors. 

The  next  chapter  will  trace  the  essential  similarities  of 
urban  to  agricultural  rents.  It  will  be  shown  that  while 
urban  rents  are  almost  entirely  positional,  the  differences  in 
position  are  the  basis  of  a  wide  diversity,  both  in  degree  and 
in  kind,  in  the  ultimate  incomes  attaching  to  urban  lands  and 
in  the  derivative  money  incomes  ;  that  in  the  main  the  growth 
of  urban  rents  in  the  aggregate,  as  compared  A\ath  agricultural 
rents,  is  due  to  the  development  of  technique  in  its  bearing 
upon  agricultural  production,  taken  in  cormection  udth  the 
marked  inelasticity  in  the  consumption  of  agricultural  prod- 
ucts ;  that  at  the  same  time,  the  development  of  urban  trans- 
portation has  profoundly  affected  the  distribution  of  posi- 
tional advantages  within  the  city  —  widening  greatly  the 
city  area,  diminishing  the  density  of  the  population,  and 
scattering  the  residence  centers ;  but  that  the  effects  have 
been  equally  marked  in  consolidating  and  congesting  the 
central  retail  area  at  the  chief  intersecting  point  of  the  lines 
of  urban  passenger  service. 


LAND  RENT  AND  COST  195 

The  chapter  will  then  examine  the  most  plausible  of  all  the 
arguments  for  the  view  that  land  rents  take  no  part  in  the 
fixation  of  price,  and  will  show  that,  even  with  reference  to 
the  rent  costs  of  merchandising,  the  classical  position  is  un- 
tenable ;  that  the  rent  costs  of  merchandising  are  only  one  of 
many  different  costs  attaching  to  the  selling  of  goods.  Shall 
outlays  for  advertising  be  also  excluded  from  price-determin- 
ing cost  ?  for  transportation  ?  for  taxes  ?  It  is  true  that  all 
competitors  pay  these  different  costs  in  approximate  ratio 
to  the  advantages  attending  them.  So  comjietition  forces 
rents  high  enough  to  cancel  most  of  the  advantages  going 
with  differentials  of  position  —  precisely  also  as  agricultural 
rents  cancel  the  objective  differences  of  advantage  between 
different  grades  of  cultivated  lands.  But  the  exclusion  of  any 
cost  outlay  by  this  test  would  compel  the  elimination  of  all 
differences  in  wages  from  cost.  And  finally  the  chapter  will 
return  to  a  further  emphasis  of  the  truth  that  rent  costs,  like 
all  other  costs,  are  merely  signboards  pointing  to  the  ultimate 
explanation  of  price  rather  than  themselves  such  explanation. 
Not  the  rents  paid  for  urban  sites  for  business,  but  only  the 
restricted  areas  for  the  transaction  of  this  business,  are  the 
ultimate  terms  in  the  explanation  of  the  prices  of  the  goods 
sold. 


CHAPTER  XIII 

URBAN  RENTS,  AGRICULTURAL  RENTS,  AND  COSTS 

Position  and  city  rents :  business  sites.  —  With  agricul- 
tural rents,  there  are,  as  we  have  seen,  two  aspects  of 
(lilTerential  advantage,  position  and  fertility.  With  urban 
rents,  the  sole  appreciable  influence  is  that  of  position.  But 
with  this  one  fact  of  position  go  many  different  kinds  of 
advantage.  For  retail  business,  convenience  of  accessibility 
for  retail  customers  is  the  controlling  factor.  Thus  the 
business  section  of  the  city  is  constantly  extending  its  ten- 
tacles into  the  residence  districts  —  the  shops  little  by  little 
establishing  themselves  farther  out  as  the  city  grows,  traffic 
eating  its  way  into  what  were  earlier  the  places  of  quiet. 
And  frequently  also,  with  the  increasing  size  of  the  city  and 
with  the  increasing  difficulty  of  retail  service  from  one  do\vn- 
towTi  business  nucleus,  there  grow  up  other  nuclei  of  retail 
trade,  commonly  near  to  suburban  railroad  stations,  or  at 
intersections  of  street-car  lines.  Large  prices  attach  to  the 
more  favorably  situated  of  these  business  sites.  That  twice 
as  many  people  pass  a  corner  lot  as  an  inside  lot  is  the  expla- 
nation for  the  higher  rents  and  the  higher  market  prices  of 
corner  properties.  Those  businesses  peculiarly  dependent 
upon  the  custom  of  chance  passers-by,  or  in  marked  degree 
dependent  upon  ready  accessibility  for  their  clientele,  e.g., 
drug  stores  and  banks,  are  especially  likely  to  choose 
corner  locations.  The  value  rests  in  the  opportunity  for 
gainful  trade.  Position  counts  for  much  in  controlling 
trade  —  serves  in  place  of  advertising  —  is,  in  effect,  one 
means  of  publicity.  The  sale  price  of  the  lot  is  the  present 
market  worth  of  the  gains  which  the  control  of  the  location 
promises  —  an  expectation  extending  often  far  into  the 
future,  and  not  rarely  embracing  prospects  of  gainful  trad- 
ing with  generations  yet  unborn. 

196 


URBAN  RENTS  AND   COST  197 

With  wholesale  houses,  the  more  important  consideration 
is  that  of  shipping  facilities  —  nearness  to  stations  and 
wharves.  Manufacturing  plants  especially  covet  good 
side-track  service  for  the  receipt  of  materials  and  for  the 
outward  shipment  of  finished  products.  Residence  lots 
trace  their  value  in  the  main  to  a  similar  and  yet  a  different 
set  of  influences  —  to  sightliness,  healthfulness,  nearness  to 
schools  and  churches,  convenience  of  street-car  service,  and 
especially  to  the  character  of  the  neighboring  residents  and 
the  quality  of  the  surrounding  improvements.  Among 
the  most  important  of  these  improvements  are  the  actual 
or  prospective  paving  and  grading  of  streets,  and  an  estab- 
lished service  of  gas,  water,  light,  and  telephone. 

Residence  sites.  —  In  the  large  and  in  the  aggregate,  the 
rents  and  prices  of  residence  property  are  evidently  dependent 
upon  the  size  of  the  city.  The  greater  the  population,  the 
more  the  city  must  absorb  the  near-by  farm  areas,  the  more 
the  pastures  must  be  cut  up  into  city  lots.  The  residence 
margin  is  like  the  extensive  margin  of  cultivation,  extending 
constantly  to  the  more  and  more  remote  and  less  desirable 
lands.  The  remoter  lots  are  available  for  homes  only  on 
terms  of  larger  passenger  rates  and  of  greater  expenditure 
of  time  and  convenience.  Lands  at  this  extensive  margin 
of  city  growth  command  small  rents  and  therefore  bear  very 
limited  prices.  Even  when  a  suburb  enjoys  especial  ad- 
vantages of  sightliness  or  of  beauty  or  of  wealthy  dwellers, 
the  land  values  are  likely  to  be  low  in  comparison  with  lands 
similarly  favored  but  nearer  to  the  municipal  center  of 
things.  The  differentials,  therefore,  which  characterize 
agricultural  holdings  are  equally  manifest,  after  their  own 
kind,  with  urban  sites,  whether  utilized  for  residence  or  for 
commerce. 

Differential  advantages  in  position.  —  The  theory  for  the  case 
may  be  illustrated  as  follows  :  If,  from  a  distant  spring,  we  supply 
ourselves  with  water  without  charge,  and  from  a  spring  near  by  pay 
a  water  fee,  the  difference  in  money  outlay  may  be  regarded  as  not 
so  much  a  difference  in  the  amount  of  rent  as  in  its  direction  and 
kind.     With  a  distant  spring,  the  rent  is  a  travel  rent,  the  market 


198  THE  ECONOMICS  OF  ENTERPRISE 

equivalent  of  the  money  rent  of  the  nearer.  Precisely  so,  the  better 
resilience  sites  command  a  money  differential  above  the  less  de- 
sirable and  the  marginal  sites.  So  far  as  the  differentials  arc  merely 
those  of  transjjortation,  our  analysis  might  then  declare  that  the 
distant  lands  jxiy  rents  in  terms  not  of  landlords'  exactions,  but 
rather  of  walking  to  and  fro  ujion  the  earth,  or  of  the  keep  of  car- 
riage and  horse,  or  of  outlays  for  train  and  tram  service.  The  less 
remote  lands  return  their  rents  for  the  most  part  in  the  form  of 
money  accruing  to  the  landlords,  as  the  condition  on  which  these 
alternative  burdens  are  to  be  avoided.  And  if  the  occupant  himself 
is  the  owner,  his  investment  justifies  itself  as  the  cash  outlay  on 
terms  of  which  he  is  excused  from  other  sorts  of  rental  charge. 
He  loses  interest  receipts,  but  thereby  protects  himself  from  rent 
outlays  in  cash,  or  from  the  alternative  burdens  of  inconvenience,  or 
of  constant  driblets  of  car  fare. 

The  product  from  position.  —  In  fact,  however,  urban  residence 
rents  are  mucli  more  than  mere  transportation  differentials.  Perhaps 
the  largest  outlay  is  for  the  privilege  of  living  on  the  street  where 
live  the  people  that  one  likes  to  be  known  to  live  near.  In  truth, 
wliile  urban  lands  bear  no  crop  in  the  ordinary  agricultural  sense, 
the  crop  is  still  there,  though  of  a  less  tangible  and  material  sort. 
The  ultimate  incomes  which  they  afford,  and  of  which  the  money 
rents  are  the  market  prices,  are  incomes  of  comfort  or  health  or 
convenience  or  beauty  or  pri^^lege  —  real  and  actual  and  valuable 
incomes  despite  their  lack  of  all  weight  or  bulk  or  spatial  extension  — 
incomes  which  motivate  and  explain  the  command  of  money  rentals 
as  the  market  value  of  the  ultimate  incomes  of  service. 

Rent  and  individual  desert.  —  It  is  obvious  that  with 
agricultural  and  urban  lands  the  rents  and  the  derivative  mar- 
ket prices  are  commonly  due  in  no  appreciable  degree  to  the 
skill  or  industry  of  the  present  owner  or  of  any  former  owner. 
That  a  farm  in  a  new  country  rises  in  price  is  due  to  the  fact 
that  the  world  demand  for  agricultural  products  is  increas- 
ingly placing  a  premium  upon  the  agricultural  opportunity 
which  this  land  controls.  New  lines  of  transportation  are 
affording  quicker  and  cheaper  access  to  a  wider  and  wider 
market ;  therewith  a  larger  gain  attaches  to  the  land,  not 
solely  in  the  saved  expense  of  marketing  its  products,  but 
also  in  the  lower  prices  on  all  purchased  supplies  —  imple- 
ments, raw  materials,  and  foodstuffs. 


URBAN  RENTS   AND   COST  199 

Rents  and  improving  processes.  —  Whether  these  better 
conditions  of  transportation  would  help  any  particular  farm 
or  locality,  were  the  improvements  adopted  generally  rather 
than  merely  locally,  we  need  not  now  inquire.  It  is,  at 
any  rate,  clear  that  transportation  is  only  one  of  the  ways  in 
which  the  advance  of  civilization  tends  to  lower  the  costs 
and  the  prices  of  agricultural  products.  Diminishing  charges 
for  machinery,  and  every  improvement  in  the  technique  of 
cultivation  —  e.g.,  new  methods  of  rotating  crops,  deep 
plowing,  better  fertilizers  —  work  to  lower  the  costs  of  the 
product  and  to  increase  the  volume  to  be  marketed.  Better 
varieties  of  crops  are  likewise  effective  in  diminishing  the 
costs.  All  these  different  lines  of  advance  are  evidently 
social  in  their  origin ;  but  equally  evidently,  they  are  indi- 
vidual in  their  contribution  to  gain,  so  far,  at  all  events, 
as  they  tend  toward  higher  rents  on  lands  rather  than  toward 
lower  prices  for  the  consumers  of  products.  (See  note,  p.  456.) 
Society  makes  the  improvement,  and  the  individual  landholder 
seizes  the  benefit.  His  title  of  ownership  in  that  which  he 
has  not  produced  authorizes  him  to  collect  a  rent  from  his 
fellows  for  that  which  is  not  his  but  their  accomplishment. 

Rent  as  a  distributive  fraction.  —  Nor  is  this  all  of  the  case, 
so  far  as  the  higher  rents  are  due  to  an  increase  of  population. 
The  strongest  influence  toward  rising  rents  is  the  movement 
of  cultivation  to  poorer  grades  of  land,  as  induced  by  the 
increasing  demand  for  agricultural  products  and  the  deriva- 
tive higher  prices.  If  labor  and  appliances  and  fertilizers 
are  to  achieve  their  best  results,  it  is  necessary  that  the  land 
factor  in  production  be  in  proper  proportion  to  the  other 
factors.  Agricultural  industry  seriously  suffers  in  its  prod- 
uct if  the  supply  of  land  is  inadequate.  This  is  simply  to 
repeat  what,  in  a  slightly  different  connection,  was  set  forth 
in  the  preceding  chapter  ;  it  is  merely  to  emphasize  the  social 
significance  of  the  law  of  the  proper  proportion  of  factors,  — ■ 
a  law  which,  in  its  special  application  to  agricultural  produc- 
tion, is  commonly  known  as  the  law  of  diminishing  returns. 

Population  and  rural  rent.  —  How  much  land  one  may 
advantageously  work  and  with  how  expensive  equipment, 


200  THE  ECOXOMICS  OF  EX  TE  HP  RISE 

depends,  of  course,  on  what  crop  he  is  going  to  raise.  But 
one  cannot  ordinarily  raise  as  much  per  acre  from  four  acres 
as  from  two,  nor  can  one  ordinarily,  by  doubling  Avage  and 
other  expenses  on  his  ten  acres,  thereby  double  the  product. 
Were  it  possible  continually  to  double  product  by  doubling 
the  non-rent  expenses  of  cultivation,  there  could  never  come 
any  need  of  more  cultivated  land,  no  matter  what  increase 
might  take  place  in  the  demand  for  agricultural  product. 
As  the  situation  actually  is,  a  larger  demand  for  product  is 
met  in  part  by  the  cultivation  of  more  land. 

It  has  likewise  been  made  clear  that  if  population  w^re  suffi- 
ciently sparse,  only  the  best  land  would  need  to  be  cultivated  ; 
and  that  if  the  supply  of  this  land  outran  the  need,  no  rent 
would  have  to  be  paid  by  any  one,  since,  if  rent  were  de- 
manded, the  cultivator  would  have  his  choice  of  other  lands 
equally  good.  But,  with  any  considerable  increase  in  popu- 
lation, land  of  inferior  quality  or  land  at  inconvenient  dis- 
tances must  be  brought  under  cultivation,  and  rent  be  paid 
for  all  land  superior  in  quality  or  position,  according  to  the 
degree  of  the  superiority.  With  third-quality  land  in  use, 
the  second  quality  commands  a  rent. 

Urban  versus  rural  tendencies  in  rents.  —  Increase  of 
population,  then,  it  is  clear,  is  a  force  making  for  the  increase 
of  agricultural  rent.  All  local  and  special  improvements 
in  transportation,  in  methods,  in  varieties  of  crop,  tend  to 
raise  the  rents  of  the  particular  land  affected  by  them,  but,  by 
increasing  the  supply  of  products,  tend  to  diminish  the  rents  of 
those  lands  not  so  affected.  On  which  side  rests  the  balance  of 
effects  is  a  problem  which  will  later  require  a  deal  of  attention. 
(See  note,  p.  456.)  But  by  far  the  more  important  effects 
of  these  different  sorts  of  improvements  are  in  other  direc- 
tions —  in  the  strong  influence  toward  the  growth  of  urban 
populations  and  toward  the  colossal  rise  of  rents  in  the  cities. 

With  a  given  population,  the  consumption  of  agricultural 
product  is  neither  greatly  to  be  increased  nor  very  seriously 
to  be  diminished.  Especially  does  this  hold  of  food  products. 
It  would  be  going  too  far  to  assert  that  there  is  an  entire 
lack  of  elasticity  here,  that  no  more  and  no  less  of  food  and 
of  the  raw  materials  of  industry  can,  as  an  aggregate,  be 


URBAN  RENTS  AND   COST  201 

consumed.  There  is  doubtless  some  elasticity  in  either 
direction.  All  that  can  safely  be  asserted  is  that  this  line 
of  consumption  is  relatively  an  inelastic  line.  If  the  world 
harvest  of  any  year  were  twice  the  usual  return,  much  food 
would  rot  upon  the  ground  as  a  useless  surplus.  On  the 
contrary,  were  the  harvest  only  one  half  the  normal,  the 
richer  people  and  the  more  well-to-do  would  bid  up  the  price- 
mostly  beyond  the  reach  of  the  hungry  poor.  The  break- 
ing down  of  the  social  order,  the  general  loosening  of  social 
bonds,  and  the  rule  of  the  strongest  would  be  the  result.  Only 
pillage,  riot,  and  rebellion  would  remain  to  the  poor.  Two 
centuries  ago,  an  Italian  wrote :  "A  disgusting  thing  is  a 
rat ;  but  in  the  siege  of  Cesilino,  one  sold  for  eight  florins. 
And  it  was  cheap  at  that,  for  he  that  bought  it  lived,  and  he 
that  sold  it  died."  Recall  also  the  prices  of  products  and 
the  public  disorders  in  the  siege  of  Paris  in  1870. 

Primitive  agriculture  imposes  country  living.  —  The  fact 
that  food  is  the  primary  human  need  is  the  explanation  of 
the  prevailingly  agricultural  character  of  the  mediaeval 
societies.  What,  in  fact,  has  been  the  meaning  of  the  re- 
distributions of  population  especially  characterizing  the 
last  two  centuries?  The  urban  population  has  far  out- 
stripped in  rapidity  of  increase  the  agricultural  population. 
The  growth  of  the  small  city  as  against  the  country,  and  of 
the  great  city  as  against  the  small  city,  is  one  of  the  most 
obtrusive  facts  of  modern  life.  The  new  and  agricultural 
countries  like  America  and  Australia,  equally  with  the  older 
countries,  manifest  these  redistributions  of  population ;  and, 
on  the  other  hand,  in  point  of  the  degree  of  the  tendency,  the 
thickly  populated  countries  of  Europe  fall  not  at  all  behind 
the  sparsely  and  newly  settled  countries.  City  growth  is 
general  in  the  modern  world. 

Better  agriculture  increases  city  living.  —  The  growth 
of  the  city  is  not  ultimately  to  be  explained  by  the  improve- 
ment of  industrial  processes.  Only  such  men  can  work  in 
manufacturing  as  the  falling  prices  of  food  products  rela- 
tively to  manufacturing  products  dismiss  from  the  processes 
of  food  production.  So  long  as  the  food  product  from  one 
man's  labor  sufficed  for  the  food  requirement  of  only  one 


202  THE  ECONOMICS  OF  ENTERPRISE 

man,  the  entire  population  was  compelled  to  occupy  itself 
with  agriculture;  now,  when  one  man's  lahor  will  feed  three 
men,  two  thirds  of  the  population  may  be  urban.  So  also, 
the  development  of  transportation  serves  for  the  most  part 
to  explain,  not  why  so  large  a  proportion  of  the  population 
is  now  agricultural,  but  only  the  distribution  of  the  non- 
agricultural  population.  To  the  extent  solely  that  trans- 
portation has  opened  up  more  land  or  better  grades  of  land 
to  agricultural  uses,  or  is  itself  to  be  ranked  as  one  of  the 
processes  of  agricultiu'al  production,  is  transportation  re- 
sponsible for  the  growth  of  non-agricultural  emj)loyment. 
And  precisely  here  it  should  be  remarked  that  to  the  extent 
that,  in  the  production  of  implements  and  appliances,  manu- 
facturing is  itself  an  agricultural  process,  to  precisely  this 
extent  industrial  improvement  must  have  limited  the  growth 
of  the  rural  population. 

Improving  transportation,  then,  so  far  as  it  is  not  at  the 
same  time  to  be  regarded  as  improving  agriculture,  has  had 
its  effect,  not  in  emphasizing  the  growth  of  urban  as  against 
agricultural  population,  but  in  fostering  the  growth  of  tlie 
small  city  as  against  the  village  and  of  the  great  city  as  against 
the  small  city.  Looked  at  from  a  more  distinctly  technologi- 
cal point  of  view,  this  truth  would  read  that  transportation 
has  fostered  the  giant  industry  as  over  against  many  small 
competing  industrial  units. ^ 

Similarities  between  urban  and  rural  rents.  —  But  however  differ- 
ent are  the  forces  which  make  for  an  increase  of  urban  population, 
and  thereby  raise  urban  as  against  rural  rents,  it  is  clear  that 
many  laws  are  common  to  both.  As  cultivated  lands  find  their 
margin  at  the  alternative  use  for  grazing,  forestry,  and  the  like, 
so  town  lots  may  find  their  margin  at  the  alternative  of  market 
gardening  or  of  other  intensive  cultivation.  Improved  urban  trans- 
portation lowers  the  rents  of  inside  lots  and  raises  the  rents  of  the 
remoter  sites,  just  as  the  near-by  agricultural  lands  lose  in  rental 
value  while  the  distant  lands  are  gaining.     Precisely  as  the  dearer 

'  The  New  York  Commercial  and  Financial  Chronicle  of  Decem- 
ber 9,  1911,  reports  the  sale,  at  $866  per  square  foot,  of  a  tract  of 
land  on  Broadway  comprising  1154  square  feet.  This  price  was  at 
the  rate  of  $37,500,000  per  acre. 


URBAN  RENTS   AND   COST  203 

agricultural  lands  require  and  justify  a  more  intensive  tjrpe  of  culti- 
vation — •  require,  that  is,  larger  expense  in  labor  appliances  and 
fertilizers,  together  with  larger  expense  in  land  rents  —  so  the  high- 
priced  urban  sites  require  a  correspondingly  more  expensive  type  of 
improvement  if  the  total  investment  is  to  yield  its  maximum  rate  of 
return.  Urban  lands  equally  with  rural  lands  exhibit  this  necessity 
for  observing  the  due  proportions  of  factors  and  the  due  distribution 
of  expense  among  them,  in  view,  of  course,  of  the  terms  upon  which 
each  is  to  be  had.  Both  manifest  the  same  limitations  upon  the 
applications  of  further  doses  of  expense,  — •  with  agricultural  lands, 
the  point  where  further  outlays  barely  return  an  indemnity  in  the 
price  of  the  added  product  — •  with  urban  lands,  the  point  where  the 
interest  upon  further  outlays  is  barely  remunerated  by  the  added 
earning  power  of  the  property.  Shall  the  building  be  carried  another 
floor  higher?  What,  through  added  height  and  extra  thickness  of 
wall,  will  be  the  yearly  cost  of  this  extra  story  as  against  the  in- 
creased rentals  to  be  collected?  It  is,  then,  the  high  ground  rents 
and  the  high  prices  of  city  properties  that  push  the  buildings  higher 
and  higher  into  the  air.  Without  these  lofty  and  expensive  struc- 
tures some  of  the  earning  powers  of  the  land  must  go  to  waste. 
The  renter  or  owner  would  be  paying  for  them  but  failing  to  use 
them.  It  is  for  him  rightly  to  apportion  the  factors  in  his  invest- 
ment or  to  lose.  All  these  laws,  then,  are  equally  applicable  to 
urban  and  to  rural  rents. 

Transportation  and  city  life.  —  Developing  urban  and  surburban 
transportation  have,  then,  been  effective  to  extend  the  city  over  a 
much  wider  area,  greatly  limiting  the  rise  of  rents  upon  inside 
residence  sites  and  greatly  enhancing  the  rental  values  of  outside 
properties.  Comparing  cities  equal  in  size,  the  modern  city  is  far 
less  crowded  then  the  mediaeval ;  there  are  more  separate  houses 
and  with  larger  yards  —  in  general,  a  smaller  population  to  the 
acre.  It  was  not  so  much  the  need  of  the  mediaeval  city  to  be  walled 
that  caused  it  to  be  compactly  built,  as  that,  being  compactly  built, 
it  could  be  easily  walled.  To  fortify  in  this  way  a  modern  city  of 
equal  population,  were  it  necessary,  would  be  a  much  more  serious 
problem.  And  likewise,  with  these  large  areas,  go  greater  expenses  in 
paving,  grading,  sewering,  and  for  gas  and  water  service,  together 
with  constantly  greater  difficulty  in  lighting  and  policing  the  streets. 
The  high  taxes  of  the  modern  city  life  are  in  no  small  part  a  matter 
of  the  mere  area  which  the  modern  city  covers. 

Transportation  and  business  rents.  —  But,  curiously  enough,  the 
business  district  of  the  modern  city  has  become  not  less,  but  more, 


204  THE  ECONOMICS  OF  ENTERPRISE 

compact  with  tlio  growth  of  urban  transportation.  As  a  matter  of 
ready  connection  of  one  urban  line  with  anotlior,  and  of  easy  transfer, 
it  is  iniiiortant  that  all  the  urban  and  suburban  ])assenser  lines  have 
soniethinji;  like  a  connuon  terminal.  Thus  all  tend  to  converge  at 
the  city  center,  like  the  spokes  at  the  hul)  of  a  wheel.  This  point 
of  common  meeting  becomes,  in  turn,  still  more  emphatically  tlie 
municipal  center,  and  a  center  which,  by  the  ver}'-  necessities  of  the 
case,  cannot  cover  a  very  wide  area.  Even  with  the  device  of  an 
inner  loop  line  connecting  the  different  converging  roads,  the  area  of 
congestion  is  not  greatly  extended,  and  a  sharp  line  of  demarcation 
in  rental  values  is  set  up  between  the  property  within  the  loop  and 
that  outside.  Inside  this  narrow  area,  values  shoot  skyward  al- 
most as  obviousl)'  as  the  buildings.  Grouped  comi)actly  about  tliis 
favored  district  will  be  found  the  remainder  of  the  distinctly  down- 
town shopping  and  wholesale  business  houses. 

The  subordinate  business  streets  of  the  city  will  mostly  be  found 
to  follow  the  lines  of  passenger  traffic  out  into  the  residence  districts. 
In  no  city  of  the  modern  tj^pe  of  growth  could  a  great  retail  shop  be 
situated  as  is  "  Au  Bon  Marche  "  in  Paris  —  a  mile  or  so  away 
from  general  business,  across  the  Seine,  in  a  quiet  residence  quarter. 
Nor,  with  the  general  trend  of  tilings,  is  this  business  likely  long  to 
thrive  in  this  locahty. 

Business  rents  and  prices  of  goods.  —  Leaving  it  still 
to  stand  as  dubious  whether  for  the  next  few  hundred  years 
agricultural  rents  will  rise  or  fall,  but  holding  it  as  certain 
that  urban  rents  will  sharply  rise,  we  now  turn  to  examine 
the  relation  of  shop  rents  and  of  factory  rents  to  the  selling 
prices  of  commodities.  Is  it  true  that  the  rent  of  the  urban 
site,  the  ground  rent,  paid  by  the  factory  or  by  the  retail 
business  or  by  the  wholesale  establishment,  is  not  a  price- 
determining  cost  in  the  commodities  sold  ?  Do  the  products 
sell  readily  or  sell  at  good  prices  because  the  rent  is  paid,  or 
is  the  rent  paid  because  the  products  sell  readily  or  at  good 
prices  ?  Are  the  rents  the  results  or  the  causes  of  the  prices  ? 
What,  for  example,  shall  be  said  of  the  occasional  advertise- 
ment of  some  competing  merchant  that  he  can  make  low 
prices  because  his  rent  outlays  are  low  ?  Or  is  it  rather  true 
that  the  prices,  so  far  as  rents  are  concerned,  are  fixed  by 
some  suburban  dealer,  some  man  on  the  outside  circumfer- 
ence of  things,  at  the  extensive  margin  of  retail  competition, 


URBAN  RENTS  AND   COST  205 

where  the  land  rent  is  approximately  nil?  Or  are  the  prices 
fixed  at  the  intensive  margin,  the  point  at  which  the  non- 
rent  cost  of  putting  the  goods  upon  the  market  sets  a  limit 
to  further  sales  —  where,  that  is  to  say,  the  site  gives  no 
further  services  in  selling,  the  incidental  crowding  and 
"  messing  "  of  things  imposing  the  choice  between  more 
space  at  more  cost  and  a  reduction  in  the  volume  of  business  ? 

What  does  cursory  observation  indicate  as  to  the  bearing  of  ground 
rent  on  price?  Do  retail  merchants  at  the  extensive  margin  in  the 
city  or  others  in  the  small  town,  sell  more  cheaply  or  less  cheaply 
than  the  down-town  dealer  in  the  city?  And  when,  if  either,  and 
why?  The  neighborhood  grocer  in  the  suburbs  can,  if  he  must, 
charge  more  than  the  down-town  grocer,  because  the  former  really 
sells  a  little  different  good  —  the  same  material  thing  plus,  however, 
utilities  both  of  place  and  of  time  —  ready  and  immediate  accessi- 
bility. Likewise,  one  commonly  pays  more  for  pins  and  needles 
and  thread  and  cotton  prints  and  sheeting,  if  one  buys  in  a  small 
local  shop.  But  this  is  due  to  the  fact  that  the  customers  are  few : 
both  the  non-rent  costs  and  the  rent  costs  may  be  higher  relatively 
to  the  volume  of  sales.  In  view  of  the  paucity  of  customers  and  the 
non-rent  costs  of  making  each  sale,  the  land  is  not  worth  a  high 
rental. 

Place  utilities  and  costs.  —  But  possibly  the  country  dealer  is  not 
safely  to  be  compared  with  the  city  dealer,  because  of  the  freight 
rates  which  the  country  dealer  must  include  in  his  prices,  so  far  as 
his  goods  are  bought  from  the  wholesaler.  Lumber,  for  example, 
is  likely  to  be  higher  in  the  small  town.  But  the  same  fact  of  freight 
holds  for  the  suburban  grocer  :  he  buys  from  the  down-town  whole- 
saler and  from  the  down-town  produce  broker.  His  costs  are  there- 
by greater,  as  the  condition  on  which  he  can  supply  the  higher 
suburban  utilities  of  place  and  time  to  his  suburban  customers.  In 
those  quarters  of  town  in  which  the  customer  neither  can  nor  will 
pay  much  for  these  utilities,  the  dealer  must  make  good  these 
extra  costs  by  economies  in  other  lines  —  a  less  attractive  or  con- 
venient or  tidy  or  spacious  place  of  business.  His  goods  may  be 
dearer  or  cheaper  than  the  goods  of  his  down-town  competitor,  but 
they  are  evidently  not  precisely  the  same  goods. 

Nor  is  it  clear  that  the  down-town  goods  are  always  the  cheaper. 
On  one  street,  they  may  indeed  be  appreciably  cheaper  than  on 
some  other  street  a  bit  more  conveniently  reached  by  customers. 
If  the  customers  go  to  the  cheaper  street,  they  pay  a  part  of  the 


206  THE  ECONOMICS  OF  ENTERPRISE 

purchase  price  in  wiilking.  Again,  it  is  not  rare  that  the  wares  of 
one  deaUM-  are  especially  hish,  because  it  is  good  form  to  have  an 
account  with  this  dealer  —  the  best  jieople  all  do  it;  all  high-class 
dressers  ha\-e  their  clothes  made  bj'  tailor  X.  The  same  thing  with 
the  mark  of  another  tailor  might  occasion  some  humiliation  —  that 
is,  would  not  be  the  same  thing  for  the  purpose. 

So  far,  then,  as  observation  indicates,  differences  in  prices  do  not, 
on  the  whole,  seem  to  be  explicable  by  differences  in  rent,  but  rather 
to  be  mostly  due  to  other  causes  pecuhar  to  the  respective  cases 
under  examination.  Nor  even  where  one  merchant  gets  higher 
prices  than  another  does  this  seem  to  be  due  to  the  fact  that  his  rent 
is  liigher,  any  more  than  the  higher  rent  appears  to  be  due  to  his 
higher  prices.  The  same  goods  sold  by  him  are  not  really  the  same : 
they  are  really  better  for  some  of  the  purposes  for  wliich  goods  are 
bought.  And  when  the  prices  are  clearly  due  to  differences  in  loca- 
tion, there  again  are  discovered  differences  in  goods  in  point  of 
convenience  or  place  or  time. 

Rents  are  selling  costs.  —  Here,  then,  if  anywhere,  is 
there  a  strong  case  for  the  doctrine  that  rents,  —  this  kind 
of  rents,  —  do  not  enter  as  causes  into  the  selling  prices  of 
goods,  but  are  rather  the  results  of  the  prices. 

But  the  truth  is  that  rents  are  one  of  the  costs  of  selling 
goods.  In  large  part,  they  are  like  advertising  outlays,  wages 
of  salesmen,  provision  of  rest  rooms,  free  directories,  chairs 
for  the  ladies  waiting  for  the  car.  They  are  the  costs  of 
furnishing  the  particular  kind  of  good,  a  good  of  a  partic- 
ular place  and  time ;  or  they  are  a  hire  paid  for  the  op- 
portunity of  meeting  so  many  customers  and  of  making  so 
many  sales.  The  choicer  locations  promise  larger  gross 
gains,  through  the  larger  number  of  sales  or  through  the 
especially  favorable  prices  at  which  the  sales  may  be  made. 
Therefore  the  competition  of  dealers  seeking  these  gains 
mostly  cancels  them,  to  the  advantage  of  the  landlord  in 
his  larger  rents.  Rent  is  the  market  price  of  the  gain- 
promising  opportunity.  If  the  prices  which  can  be  charged 
are  higher,  the  rent  costs  tend  also  to  be  higher.  Or  if  the 
other  expenses  of  selling  are  diminished,  the  rent  is  the  charge 
collected  for  what,  without  the  rent,  would  be  a  saving  and 
a  gain.     The  case  is  like  paying  wages  to  better  laborers 


URBAN  RENTS  AND   COST  207 

for  their  greater  product,  or  like  paying  salaries  to  efficiency 
engineers  for  devising  economies  of  operation.  These  added 
services  impose  costs  upon  any  operator  precisely  because  he 
cannot  have  these  additions  without  paying  for  them.  If 
one  merchant  will  not  hire  the  land,  another  will.  It  may 
well  be  true  that  whatever  customers  one  merchant  gains 
other  merchants  lose,  —  that  the  control  of  the  more  favor- 
able site  has  only  a  purely  competitive  and  differential  sig- 
nificance, —  but  this  is  not  at  all  peculiar  to  the  problem  of 
business  rents.  It  is  precisely  so  with  most  advertising 
competitions  and  with  the  larger  part  of  the  outlays  made 
for  commercial  travelers.  It  is  the  admitted  vice  of  many 
competitive  activities,  that  they  increase  the  cost  of  achiev- 
ing a  given  result,  that  they  are  socially  wasteful,  and  that, 
increasing  the  costs,  they  commonly  increase  the  necessary 
price. 

The  ultimate  cause  is  the  scarcity  of  sites.  —  But  this  is 
not  the  final  reply  to  the  contention  that  business  rents  are 
not  price-making  costs.  It  is  true  that  if  the  landlord  must 
accept  a  lower  rent,  this  would  not  diminish  the  price,  but 
merely  leave  a  larger  profit  to  the  tenant  merchant.  But 
the  difficulty  is  ultimately  neither  in  the  rental  nor  in  the 
personal  distribution  of  it,  but  solely  in  the  fact  that  the 
convenient  and  attractive  and  popular  business  sites  are 
limited.  And  this  is  true  in  the  very  nature  of  the  case  ;  not 
all  the  different  streets  and  corners  can  offer  preferable  loca- 
tions. The  inevitable  congestion  of  merchandizing  at  the 
intersecting  streams  of  travel  —  that  is,  in  the  down-town 
district,  and  particularly  at  the  focusing  point  of  all  the  dif- 
ferent main  streams  of  travel  —  limits  the  supply  of  good  sites, 
and  thus  makes  the  peculiar  products  of  convenience  of  place 
and  time  a  limited  quantity,  and  therewith  the  price  of  these 
conveniences  high.  Goods  of  similar  weight  and  texture 
and  flavor,  sold  under  conditions  of  less  convenience,  are 
really  not  the  same  goods.  Precisely  so  with  those  forms 
of  advertising  which  merely  avail  to  create  a  demand  for 
things ;  they  are  really  processes  of  attaching  to  things  a 
desirability  which  the  things  previously  had  not.  Thus  the 
process  is  merely  one  of  the  creation  of  value  on  terms  of 


20S  THE  ECONOMICS  OF  ENTERPRISE 

submitting  to  a  cost.  In  larger  part,  the  rents  of  business 
sites  are  of  this  general  sort.  It  is,  however,  occasionally 
true  that  the  rent  of  a  particular  site  is  jiaid  for  the  advantage 
of  achieving  a  lower  selling  price,  which  lower  price  may 
carry  with  it  the  opportunity  of  larger  sales ;  this  site  com- 
mands a  high  rent  because  of  its  especial  adaptation  to  the 
policy  of  low  prices  with  large  sales,  —  wherewith  is  to  go  a 
generous  aggregate  return  upon  the  business  done.  But 
forthwith,  the  higher  rental  has  to  be  subtracted  from  the 
larger  gross  profits :  the  higher  rent  expresses  the  fact  that 
the  site  is  the  controlling  influence  in  the  case. 

The  following  chapter,  accepting  cost  of  production  as  a 
correct,  albeit  not  an  ultimate,  explanation  of  the  market 
prices  of  ordinary  consumption  goods,  will  inquire  how  far, 
and  through  what  bearing,  cost  of  production  is  to  be  regarded 
as  also  the  explanation  of  the  prices  of  durable  consumption 
goods  and  of  durable  production  goods.  If  durable  produc- 
tion or  consumption  goods  are  rightly  taken  to  depend  for 
their  prices  upon  the  capitalization  process,  and  interme- 
diately upon  future  incomes  and  discount  rates,  is  cost  of 
production  therefore  to  be  accepted  as  explaining  prices  only 
in  the  limited  field  of  immediately  consumable  goods,  and  as 
leaving  the  prices  of  all  other  goods  to  be  explained  through  a 
separate  and  entirely  distinct  analysis  ?  For  example  :  has 
cost  of  production  no  bearing  on  the  prices  of  pianos  or  of 
harvesting  machines  ? 


CHAPTER  XIV 

CAPITALIZATION    VERSUS    COST    AS    DETERMINANT    OF    PRICE 

Hire  and  service.  —  We  have  seen  that  the  existence  of  a  rent  or 
of  a  wage  or  of  any  other  hire  upon  any  productive  thing  is  the  proof 
that,  for  the  purposes  of  those  who  rent  or  hire,  the  thing  in  question 
is  productive  —  promises  gain,  aids  in  the  acquisitive  process ;  but 
that  it  does  not  follow  that  the  rent  or  wage  paid  by  the  individual 
who  hires  is  the  precise  correlative  and  equivalent  of  the  significance 
of  the  thing  to  society  or  even  to  him ;  the  hire  is  merely  the  market 
price  of  the  service. 

Services  present  and  future.  —  We  have  seen  also  that  some  of 
the  services  that  men  are  willing  to  pay  for  are  obtained  from  goods 
immediately  and  completely  utilized  ;  that  there  are  other  valuable 
things  for  the  enjoyment  of  whose  services  a  considerable  period 
of  time  is  necessary  —  where,  in  mathematical  phrase,  the  service  is 
something  Uke  a  function  of  the  time ;  that  some  of  these  are  dur- 
able goods  employed  in  putting  commodities  upon  the  market  — • 
mostly  goods  hke  agricultural  lands,  machines,  patent  rights, 
franchises,  milch  cows,  sheep,  barns,  worldng  cattle,  delivery 
wagons,  freight  cars  —  goods  which  are  used  in  the  process  of  pro- 
ducing other  goods  or  services,  where  the  ultimate  products  are 
ordinarily  to  be  sold ;  that  others  of  these  durable  goods  are  used 
directly  for  purposes  of  consumption,  whether  by  the  owner  of  them 
or  by  some  one  else  —  e.g.,  town  lots,  automobiles,  library  books, 
driving  horses,  houses,  carriages,  pleasure  boats,  furniture,  clothing, 
pictures ;  that  it  does  not  at  all  matter  to  the  reality  of  the  income 
rendered  by  goods  of  this  second  class  whether  one  lives  in  his  own 
house  or  lets  it  out  for  rent,  — •  drives  his  own  horse,  or  puts  it  in  his 
livery  barn,  —  uses  his  own  furniture  clear  of  debt,  or  is  paying  for 
it  in  installments  at  the  furniture  store,  —  rents  it  out  to  some  other 
user,  or  makes  it  part  of  the  furnishings  of  lodgings  or  of  his  home  — 
precisely  as  it  does  not  matter  as  a  question  of  production  whether 
one  consumes  the  vegetables  from  his  garden  or  sells  them,  whether 
one  eats  the  eggs  from  his  poultry  house  or  markets  them.  If  one 
is  the  owner  of  the  goods,  he  avoids  paying  the  hire  of  them,  but  is 
P  209 


210  THE  ECONOMICS  OF  ENTERPRISE 

compelled  to  make  the  larger  immediate  outlay  in  the  purchase  of 
them.  If  he  hires,  lie  i)ays  the  more  in  the  long  run,  but  has  not  to 
jiay  so  early. 

Present  price  and  future  service.  —  The  present  worth  of  a 
durable  consumption  good  is  due  to  the  fact  that  to  own  it  is  to  be 
entitled  to  a  series  of  valuable  services  from  it :  it  may  excuse  one 
from  the  recurring  necessity  of  renting  it ;  or  it  may  impose  upon 
some  one  else  the  necessity  of  pajdng  to  the  owner  a  rental  income 
upon  it.  The  good  is  productive  in  either  case,  whether  as  bringing 
the  OAvner  an  income  of  services,  or  of  money  with  which  to  buy 
commodities  or  services,  or  as  excusing  him  from  outlay.  In  buying 
a  durable  good,  j'ou  really  acquire  by  one  paj^ment  the  right  to  a 
series  of  ser^'iccs  —  o])erating,  so  to  speak,  not  at  retail,  but  at 
wholesale,  in  ser\'ices  accruing  in  a  time  sequence. 

Everywhere  value  depends  on  income.  —  Thus  it  has  become  clear 
that  as  ultimately  any  good  acquires  value  through  the  fact  that  it  is 
adapted  to  the  rendering  of  valuable  services  —  psychic  incomes,  as 
these  are  sometimes  called,  — that,  as  wool  commands  a  price  because 
of  the  good  derived  from  its  use, — the  result  that  it  controls, — pre- 
cisely so  a  sheep  is  valuable  accorchng  to  the  results  which  it  controls 
in  valuable  wool,  etc.,  a  cow  is  valuable  for  the  valuable  milk  that  it 
gives  —  meadow  lands  for  the  recurring  crops  of  valuable  grass  — 
houses  for  the  continuous  shelter  they  offer  —  pianos  for  the 
hours  of  valuable  pleasure  they  afford — pictures  for  the  valuable 
beauty  that  they  untiringly  present  —  bonds  for  the  interest  that 
thej^  pay,  stocks  for  the  di\adends  that  they  yield.  So,  to  cut  grass 
from  a  field  or  to  gather  fruit  from  a  tree  is  merely  the  owner's  way 
of  severing  his  maturing  coupons  from  the  parent  stem.  If,  in  fact, 
grapes  were  to  be  gathered  from  thorns  or  figs  from  thistles,  thorns 
would  no  longer  be  thorns,  or  thistles,  thistles.  All  possessions  that 
bear  rent  trace  their  value  to  the  rent  that  they  bear  —  all  equipment 
goods  to  their  forecasted  earnings  — ^all  durable  consumption  goods  to 
the  ser\'ices  that  they  promise.  The  price  of  any  one  of  these  bases 
of  incomes  is  the  present  worth  of  its  expected  future  returns.  The 
price  not  only  of  every  investment  in  stocks,  or  bonds,  or  farms,  or 
business  blocks,  or  tenement  houses,  or  annuities,  but  as  well  of  every 
investment  in  houses,  or  furniture,  or  pictures,  or  books,  or  bicycles, 
or  automobiles,  or  senatorships,  is  the  present  worth  of  what  the 
investment  will  return  in  income  —  whether  a  money  rental  of 
interest  or  of  dividends,  or  beauty,  or  comfort,  or  leadership,  or  fame. 

Capitalization  gives  capital.  —  And  it  has  been  shown  to 
follow  from  all  this  that,  given  incomes  to  start  with  and 


CAPITALIZATION    VERSUS   COST  211 

given  either  a  discount  rate  or  a  discount  attitude  for  the 
capitahzation  of  these  incomes,  there  forthwith  necessarily 
emerges  capital.^ 

Cost,  capitalization,  and  price.  —  But  in  accepting  the 
capitalization  process  —  where  it  applies  —  as  an  explana- 
tion of  market  price,  what  place  is  left  for  cost  of  production 
as  the  determinative  fact?  This  is  the  problem  of  the  pres- 
ent chapter.  The  capitalization  doctrine  purports  to  explain 
market  price  through  an  appeal  to  the  future  earnings  of 
production  goods  and  to  the  future  uses  of  consumption 
goods.  It  is  a  forward-looking  explanation.  Cost  of  pro- 
duction, on  the  other  hand,  explains  price  by  appealing  to 
the  past  of  the  good,  to  the  conditions  attending  its  pro- 
duction —  a  backward-looking  explanation.  Is  one  or  the 
other  of  these  doctrines  false,  or  is  it  possible  to  harmonize 
them? 

The  reconciliation,  if  possible  of  attainment,  must  be  ar- 
rived at  by  one  more  appeal  to  the  fundamental  generaliza- 

*  And  thereupon  it  follows  that  free  human  beings  are  not  capi- 
tal. They  do  not  get  capitalized.  The  future  earnings  are  not, 
under  the  perspective  process,  summarized  into  a  total  of  mar- 
ket worth.  Not  only  this;  but  capital  is  a  possession,  a  subhead 
under  wealth.  In  order,  therefore,  to  be  capital,  human  beings 
must  be  reduced  to  individual  possession,  to  property,  a  source  of 
income  to  the  possessor.  The  concept  of  wealth  or  capital  connotes 
something  external  to  the  owner,  an  item  in  his  environment. 
Therefore,  no  human  being  can  rank  as  part  of  his  own  wealth,  nor 
can  any  part  or  subdivision  of  him  —  his  legs,  or  arms,  or  strength, 
or  beauty,  or  digestion,  or  intelligence — ^be  wealth  to  him.  Other- 
wise, the  distinction  between  owner  and  thing  owned,  possessor 
and  possession,  subject  and  object,  property  holder  and  property, 
capitalist  and  capital,  organism  and  environment,  is  obscured  and 
violated.  Such  things,  therefore,  as  are  not  the  subject  of  in- 
dividual possession  lack  the  logical  possibility  of  ranking  -within  the 
capital  subdivision  of  wealth.  Nor  is  this  the  only  difficulty  in 
terming  free  men  capital :  capital  has  only  one  mode  of  expression, 
the  value  or  price  expression.  Value  and  price  are  market  facts  ; 
no  unmarketable  thing  can  be  capital,  being  neither  to  be  had 
nor  to  be  retained  by  the  sacrifice  of  price.  Men  do  not  get 
funded  under  the  discount  principle  into  an  aggregate  of  wealth. 
Otherwise,  wages,  like  rents,  would  be  mere  interest  in  one  of  its 
many  manifestations. 


212  THE  ECONOMICS  OF  ENTERPRISE 

tion  in  economic  theory ;  namely,  the  fixation  of  price  through 
demand  and  supply.  Cost  of  production,  as  we  have  seen, 
jiurports  to  exphiin  price  only  in  the  sense  and  to  the  degree 
that  it  explains  supply.  But  if  the  past  of  a  good  explains 
the  supply,  may  not  the  future  of  the  good  explain  the  de- 
mand ?  Or,  to  put  the  same  thing  in  another  way  :  May  not 
cost  determine  the  reservation  price,  the  asking  price,  the 
wliile  that  capitalization  of  the  future  earnings  determines 
the  price  offer,  the  demand  ? 

This  view  certainly  approximates  the  truth,  but  falls  still 
something  short.  The  difficulty  is  that  earning  power  is  not 
rightly  viewed  as  independent  of  supply.  On  the  contrary, 
the  earning  power  of  any  one  item  out  of  the  supply  is  very 
obviously  influenced  by  the  volume  of  this  supply.  The 
greater  the  supply,  the  lower  must  fall  the  rental  in  order 
that  all  be  rented.  This  rental  in  turn  is  lower  because,  with 
the  larger  supply,  the  earning  power  of  each  item  of  the 
supply  is  a  smaller  earning  power. 

Cost  and  capitalization  complementary  doctrines.  —  But 
precisely  by  this  door  is  our  exit  from  the  difficulty :  pre- 
cisely through  this  fact  is  the  reconciliation  achieved  and 
the  harmony  made  complete.  Cost  affects  price  by  affecting 
rent.  It  is  by  the  cost  that  the  supply  is  explained,  by  the 
supply  that  the  rents  are  explained,  by  the  capitalization 
of  these  rents  that  the  price-demand  is  explained.  Cost 
and  capitalization  are  therefore  not  antagonistic,  but  supple- 
mentary, doctrines  in  the  theory  of  price.  Neither  doctrine 
alone  suffices  for  the  explanation  of  the  price  of  any  durable 
good. 

Durable  consumption  goods.  —  It  may  be  taken  as  clear 
that  a  rent  upon  a  consumption  good  for  a  limited  period  of 
time  is,  in  the  main,  to  be  explained  on  the  same  principles 
as  the  market  price  of  any  immediate  consumption  good. 
With  either  sort  of  good,  this  price  is  affected  on  the  supply 
side  by  the  offered  volume  of  goods.  So  far  as  the  cost  of 
production  of  any  good  enters  into  the  case,  it  is  through  the 
elasticity  of  the  supply  under  cost  of  production  influences. 
When  the  supply  is  thus  elastic,  the  cost  of  production  is 


CAPITALIZATION   VERSUS   COST  213 

the  explanation  for  the  volume  of  the  supply  —  the  scarcity 
aspect  of  the  problem.  On  the  demand  side,  the  analysis 
appeals  to  the  sequence  from  utility  to  marginal  utility, 
thence  to  comparison  of  marginal  utilities,  thereby  finally 
arriving  at  the  different  price  offers  of  the  different  intending 
purchasers. 

That  the  services  of  long-time  consumption  goods  are, 
by  the  very  fact  of  the  remoteness  of  some  of  their  services, 
different  in  some  respects  from  the  services  of  immediate 
consumption  goods,  needs  no  further  emphasis.  Note  again, 
however,  that  there  is,  for  every  long  time  consumption  good, 
as  for  every  immediate  consumption  good,  a  price-demand 
schedule  and  a  supply-price  schedule.  When  once  this  de- 
mand schedule  and  this  supply  schedule  are  arrived  at,  the 
method  of  adjustment  of  demand  and  supply  into  a  price 
equilibrium  is  the  same  for  both  classes  of  goods.  There 
are  buyers'  surpluses  and  sellers'  surpluses  in  either  case. 
As  some  consumers  would,  if  necessary,  pay  more  for  a  loaf 
of  bread,  or  a  banana,  or  a  pound  of  meat,  or  a  ton  of  coal 
than  they  are  forced  to  pay,  so  some  buyers  would  pay  more 
for  a  house,  a  chair,  a  hat,  or  a  tennis  racket  than  the  price 
actually  imposed.  The  price  demands  are  many  and  differ- 
ent in  either  sort  of  demand  schedule,  and  plot  equally  for 
either  case  into  a  falling  price-demand  curve.  Equally  for 
either,  the  market  price  is  to  be  presented  as  the  point  of 
intersection  of  the  curves  of  demand  and  supply. 

Durable  production  goods.  —  Superficially  viewed,  the 
determination  of  the  market  price  of  the  use  of  a  long-time 
"  production  "  good  would  appear  to  follow  the  same  analy- 
sis —  on  the  one  side  a  limited  supply,  on  the  other  side  a 
demand  upheld  and  explained  by  the  fact  that  the  good 
affords  a  gain-rendering  service.  And,  in  truth,  so  far  the 
same  analysis  really  holds  for  both  classes  of  goods.  Never- 
theless, there  are  supremely  important  differences  between 
the  problem  of  prices  for  consumption  goods  and  the  prob- 
lem of  prices  for  production  goods.  With  each  immediate 
consumption  good  there  is  a  demand  curve,  or  schedule, 
which  is  fixed  for  the  case  and  for  the  time.     If  the  supply 


214  THE  ECONOMICS  OF  ENTERPRISE 

is  increased,  it  must  be  marketed  further  down  upon  the 
demand  curve  or  column.  With  a  smaller  supi)ly,  an  un- 
chansxcd  d(>mand  absorbs  the  offerings  at  a  higher  level.  The 
demand,  however,  does  not  change  with  a  change  in  supply, 
but  only  the  number  of  purchases  made.  It  is  indeed  a 
vicious  usage  to  speak  of  the  elasticity  of  demand,  or  of 
demand  rising  with  a  smaller  supply,  or  falling  with  a  larger 
supply.  It  is  merely  the  purchasing  or  consuming  that  is 
elastic,  not  the  purchasing  or  consuming  attitude :  the  de- 
mand curve  cuts  the  supply  curve  at  a  different  point  of 
intersection,  but  it  is  the  same  demand  curve. 

Changing  supply  modifies  the  conditions  behind  demand. 
—  But  with  production  goods,  whether  of  the  immediate  or 
of  the  durable  sort,  this  fixity  of  the  demand  curve  does  not 
hold.  The  demand  is  motivated  by  the  prospect  of  gain 
from  the  production  goods.  With  any  change  in  the  supply 
of  them  there  comes  a  change  in  the  total  return  from  them, 
and  in  the  return  from  each  item  of  the  supply.  The  gain 
significance  of  each  item  of  goods  upon  which  the  demand 
rests,  changes,  therefore,  with  every  change  in  the  supply. 
Lands,  machines  and  men  have  commonly  various  fields  of 
production  open  to  them.  Thus,  the  very  increase  or  de- 
crease in  the  supply  implies  and  necessitates  an  attendant 
change  in  the  volume  of  the  demand.  The  ordinary  demand 
and  supply  formula  —  entirely  accurate  for  consumption 
goods  —  is  therefore  applicable  to  production  goods  only 
as  subject  to  the  recognition  of  certain  very  important 
distinctions. 

For  example  :  do  we,  in  fact,  know  that  just  as  an  increase 
in  the  supply  of  wheat  or  of  shoes  or  of  automobiles  or  of 
houses  will  depress  the  price,  so  must  also  an  increase  in 
the  supply  of  laborers  lower  the  wage,  or  an  increase  in  the 
supply  of  land  or  of  plows  lower  the  rents?  Can  it  safely 
be  said  that,  with  more  laborers  or  with  more  machines,  the 
wages  or  the  rents  must  fall?  Or,  if  there  be  a  fall,  can  it 
be  foretold  how  rapid  this  fall  must  be  ?  If  the  labor  supply 
in  an}'-  one  industry  were  halved,  would  the  individual  wage 
be  doubled?  With  a  consumption  good,  surely,  the  price 
per  item,  or  even  the  aggregate  price,  might  more  than  double 


CAPITALIZATION  VERSUS   COST  215 

with  this  restriction  of  supply,  were  the  commodity  one  of 
a  very  inelastic  consumption.  But  is  it  possible  that,  if 
the  number  of  laborers  were  twice  as  great  in  the  aggregate, 
the  average  individual  wage  would  fall  by  one  half?  This 
would  involve  the  assumption  of  an  unchanged  aggregate 
result  in  valuable  goods.  In  point  of  fact,  this  unchanged 
aggregate  result  is  not  certain,  or  probable,  or  even  possible. 
Inevitably  the  aggregate  product  must  be  greater.  And  if, 
concurrently  with  this  increase  in  the  aggregate  supply  of 
labor,  there  went  also  a  corresponding  increase  in  the  supply 
of  land  and  of  other  equipment,  there  would  be  no  need  that 
wages  fall.  There  would  be,  indeed,  no  possibility  of  fall, 
since  there  is  excluded,  by  assumption,  the  possibility  of  less 
favorable  proportions  between  the  labor  and  the  other  fac- 
tors of  production  cooperating  with  it.  And  with  the  labor 
doubled  and  the  other  factors  remaining  stationary,  there 
is  still  an  increase  in  the  total  product  of  goods  to  be  dis- 
tributed among  the  different  cooperating  factors ;  but  clearly 
the  aggregate  product  cannot  fully  double,  since  only  one 
class  of  factors  of  production  is  doubled.  In  order  to  double 
the  products,  all  of  the  cooperating  factors  of  production 
would  need  to  be  doubled.  The  per  capita  income  of  labor 
must  therefore  fall,  if  it  be  only  the  laborers  that  have 
doubled 

Changing  relations  of  factors.  —  This  is  merely  to  extend  the 
application  of  a  principle  already  established  in  the  discussion  of 
Rural  Rents.  Fundamental  to  the  analysis  is  the  law  of  the  Pro- 
portion of  Factors.  A  change  in  per  capita  product  does  not  meas- 
ure all  the  change  which  may  befall  any  one  distributive  share  out 
of  the  aggregate  product.  Not  solely  the  amount  to  be  divided 
may  change,  but  the  terms  of  the  division.  We  have  seen  that,  as, 
with  increasing  population,  a  less  favorable  relation  comes  to  exist 
between  the  number  of  human  beings  and  the  productive  equipment 
at  their  disposal,  —  that  is,  as  production  is  driven  to  utilizing  the 
poorer  grades  or  the  lower  productive  powers  of  the  soil,  —  the  ratio 
of  total  product  to  the  number  of  producers  is  a  less  favorable  ratio. 
The  per  capita  product  suffers  by  the  fact  that  the  number  of  laborers 
has,  say,  doubled,  while  the  other  factors  of  production  have  fallen 
short  of  this  rate  of  increase.    To  double  the  product  there  must 


2K1  THE  ECONOMICS  OF  ENTERPRISE 

have  been  a  doubling  of  the  aggregate  productive  power.  If  it  is 
the  hxbor  factor  that  has  increased,  tlie  social  dividend  is  smaller 
relatively  to  the  number  of  wage  claimants;  the  divisor  increases 
faster  tlian  the  dividend,  with  bad  effects  upon  the  quotient.  But 
the  point  now  es])ecially  demanding  emi)hasis  is  that  this  does  not 
report  the  whole  case :  there  is  another  and  etjualiy  important 
aspect.  The  distribution  of  the  aggregate  product  must  be  taken  into 
account.  Land  rents  are  a  constantly  increasing  share  out  of 
this  diminisliing  per  capita  product.  The  landlords  are  gaining 
out  of  the  aggregate  dearth.  Wages  suffer,  therefore,  from  two 
causes :  a  smaller  per  capita  product,  and  less  favorable  terms  of 
division. 

The  same  principle  may  be  illustrated  in  reverse  order :  the 
Black  Death  ma}'  be  taken  to  have  swept  away  one  half  the  popula- 
tion of  England  —  leaving  unimpaired,  however,  the  supply  of  land 
and  of  other  productive  equipment.  It  thereby  became  possible 
for  the  remaining  population  to  enjoy  the  advantages  of  a  better 
per  capita  equipment  of  land  and  appliances  —  a  better  propor- 
tion between  labor  and  its  complementary  productive  goods. 
The  result  must  be  a  higher  net  wage,  derivative  in  part  from  the 
higher  per  capita  output,  in  part,  from  the  smaller  fraction  of  this 
output  apportioned  as  rent  to  the  owners  of  the  land 

Different  analysis  for  difierent  durable  goods.  —  Thus 
the  problem  of  the  rents  and  hires  of  gain-rendering  factors, 
while  still  a  price  problem  in  every  case,  calls  for  more  than 
the  usual  analysis  applicable  to  consumption  goods,  whether 
durable  or  immediate,  and  carries  the  analysis  into  some  of 
the  more  intricate  problems  of  distribution.  The  process  of 
the  determination  of  rents  and  of  wages  is  intelligible  only 
when  viewed  as  part  and  parcel  of  the  distributive  analysis 
under  which  these  remunerations  are  fixed.  An  individual's 
demand  for  a  gain-promising  good  depends  upon  the  increase 
in  price  product  which  the  good  promises  for  him.  The 
market  rent  of  this  auxiliary  in  his  effort  at  price  gain  — ■ 
its  distributive  share  —  is  established  as  the  outcome  of  a 
distributive  process  —  a  process  apportioning  to  it  a  share 
out  of  the  value  produced  by  it  in  cooperation  with  other 
gain-giving  factors. 

No  specific  efficiencies.  —  But  again,  let  it  be  noted  that  there  is  in 
this  analysis  no  warrant  for  the  conclusion  that  any  factor  at  pro- 


CAPITALIZATION    VERSUS   COST  217 

duction  has  any  specific  and  definite  utiUty  or  efficiency  proper  to 
it,  but  only  that  to  each  competing  bidder  it  has  its  separate  signifi- 
cance for  gain.  Since  the  entrepreneurs  are  different,  there  goes  a 
different  significance  for  each  different  entrepreneur. 

Nor  is  there  better  warrant  for  the  inference  that  the  gain  effi- 
ciency is  a  separate  and  distinguishable  efficiency  even  to  the  indi- 
vidual entrepreneur.  All  of  the  different  distributive  shares  are 
awarded  through  the  competitive  bids  of  entrepreneurs,  each  of 
whom  is  able  to  estimate  the  significance  to  him  of  the  good  for  his 
purposes  of  gain,  —  that  is,  to  tell  what  it  would  be  worth  his 
while  to  pay  rather  than  go  without  the  good.  But  this  is  not  to 
ascribe  either  a  specific  or  a  separate  gain-power  to  the  good.  (See 
Chap.  X.)  To  all  but  the  marginal  renter  or  hirer,  the  advantage  from 
having  the  good  is  greater  than  the  price.  All  but  the  marginal 
man  would  pay  more  if  they  had  to.  And  for  him,  in  truth,  what  he, 
as  a  maximum,  will  pay,  tells  not  how  much  gain  the  added  good 
causes,  but  rather  what  his  aggregate  complex  of  goods,  inclusive  of 
the  good  in  question,  will  afford  him  of  gain  more  than  he  could 
achieve  without  it.  A  reaper  minus  its  blade  will  harvest  nothing. 
To  add  the  blade,  and  to  get  the  harvest,  affords  no  sufficient  basis 
for  ascribing  the  whole  harvest  to  the  blade. 

Summary :  Earlier  chapters  have  made  it  clear  that  cost  of 
production  bears  on  price  only  so  far  as  it  bears  to  explain 
supply ;  that  demand  has  always  to  be  taken  for  granted, 
supply  being  then  valid  as  explanation  only  in  the  sense  of 
serving  as  the  next  succeeding  step. 

But  even  so  large  a  function  as  this  can  be  ascribed  to  cost 
of  production  only  for  the  prices  of  immediately  consumable 
goods.  With  durable  goods,  either  of  the  production  or  of  the 
consumption  sort,  further  supplementation  is  required ;  the 
capitalization  process  must  be  appealed  to.  But  the  capital- 
ization process  is  not  rightly  to  be  regarded  as  applying  ex- 
clusively either  to  the  demand  or  the  supply  side  of  the  price 
equation.  Unless  as  supplemented  by  the  capitalization 
process,  neither  term  in  the  equation  is  adequate  to  its  func- 
tion. With  durable  goods,  each  term,  in  fact,  reacts  upon  the 
other  in  a  way  entirely  peculiar  to  this  class  of  goods.  This 
interaction  takes  place  through  the  process  of  capitalization, 
which  thus  becomes  in  some  sort  an  intermediate  term  in  the 
equation.  True,  cost  of  production  fixes  the  supply  and  de- 
termines the  reservation  prices.  But  what  fixes  the  demand 
prices  ?     These  are  derivative  from  the  future  earning  powers, 


218  THE  ECONOMICS  OF  ENTERPRISE 

whii'li  are  in  turn  dorivativc  from  the  volume  of  the  supply. 
But  these  future  earning  powers  do  not  directly  take  the  form 
of  biddhig  prices  for  the  goods.  The  capitalization  process 
is  the  sole  method  by  which  these  future  facts  transform 
themselves  into  immediate  paying  dispositions. 

The  next  step  in  the  argument  will  therefore  concern  itself 
with  a  detailed  examination  of  the  process  of  capitalization — 
a  process  which  thus  far  in  the  discussion  has  been  taken  mostly 
for  granted.  The  following  chapter  will  show  that  the  ex- 
planation of  the  price  of  every  durable  good  involves  an  ap- 
peal to  capitalization ;  that  all  durable  goods  are  capital  pre- 
cisely because  they  depend  for  their  price  upon  this  process  — ■ 
a  process  which  in  its  very  nature  involves  an  interest  factor ; 
that  given  future  incomes,  and  therewith  discount,  or  interest, 
rates,  there  emerges  capital,  and  that  anything  so  emerging 
is  capital ;  that  it  is  nevertheless  a  misconception  of  the  prob- 
lem to  interpret  the  process  as  involving  market  items  of  in- 
come or  of  rental,  and  market  rates  of  discount  to  apply  to 
them  ;  that,  as  all  bids  in  the  demand  schedule  are  individual 
bids,  the  data  and  the  processes  by  which  these  bids  are  ar- 
rived at  must  also  be  individual ;  that  the  mechanics  of  price- 
fixation  are  the  same  for  all  the  different  classes  of  market- 
able goods  —  a  demand  schedule  and  a  supply  schedule  and  a 
market  price  as  the  point  of  intersection;  and  that  therefore 
the  capitalization  process  must  underlie  and  determine  all  the 
items  of  reservation  price  in  the  supply  schedule  and  all  the 
items  of  price-offer  in  the  demand  schedule  —  the  entire 
process  here,  as  everyw^here,  requiring  a  thoroughly  individ- 
ualized analysis.  There  is  neither  need  nor  room  for  the 
social  organism  in  this  particular  field  of  doctrine. 


CHAPTER  XV 

CAPITALIZATION,    THE    PROCESS    BY    WHICH    FUTURE    INCOMES 
REACH    A    PRESENT    WORTH 

Future  service.  —  Enough  has,  perhaps,  been  said  as  to 
the  basis  of  the  compensation  paid  for  the  time  use  of  agri- 
cultural lands  or  machines  or  durable  consumption  goods 
or  residence  lots  or  residences  or  pianos  or  chairs.  And  it 
has  been  sufficiently  shown  not  to  matter  to  the  actuality 
of  the  earning  powers  of  goods  whether  they  remain  in  the 
hands  of  the  owner  or  be  rented  out  by  him  for  hire.  In  the 
one  case,  he  receives  an  income  in  valuable  services ;  in 
the  other  case,  an  income  in  money. 

It  has  also  been  made  clear  that  while  some  goods  render 
only  one  service,  —  and  that  a  future  service,  —  with  most 
durable  goods  the  value  is  dependent  upon  the  power  of 
rendering  a  series  of  services.  But  in  any  case  this  value 
is  reflected  to  the  present  from  these  future  services,  and 
depends  upon  them  in  precisely  the  same  way  as  the  value 
of  an  immediate  consumption  good  depends  on  the  ability 
of  the  good  to  render  its  immediate  service.  Lands  do  not 
earn  rents  or  render  services  because  they  are  valuable,  but 
they  are  valuable  because  of  the  power  to  earn.  Milk  or 
butter  is  not  valuable  because  the  cow  is  valuable,  but  just 
the  other  way  about,  —  "  By  their  fruits  ye  shall  know 
them." 

Time  perspective.  —  We  have  already  investigated  the 
relation  of  the  supply  of  goods  to  the  earning  power  of  these 
goods  in  the  hands  of  different  individual  bidders,  and  have 
likewise  investigated  the  relations  of  the  different  bidding 
dispositions  to  the  fixation  of  the  market  rentals  of  the 
goods.  There  are,  however,  some  extremely  important  ques- 
tions yet  to  be  examined  :  If  an  object  will  give  re  of  pleasure 

219 


220  THE  ECONOMICS  OF  ENTERPRISE 

now,  find  precisely  the  same  .r  of  ple:\sure  in  the  future  — 
will  men  prefer  it  now  or  later?  and  how  far?  and  when  and 
why? 

With  some  goods,  and  for  some  men,  the  very  fact  that 
the  service  is  not  available  now,  but  is  only  later  to  become 
available,  is  a  reason  why  the  particular  good  in  question 
suffers  in  present  importance.  Whetlier  this  is  necessarily 
and  always  true,  or  is  true  only  in  the  balance  of  cases  and 
for  the  larger  number  of  goods,  we  need  not  now  discuss. 
Whether,  indeed,  it  would  be  true  of  money,  —  suspended 
purchasing  power  in  general  —  would  be  an  open  question, 
were  it  not  for  the  pecuniary  organization  of  society  and  for 
the  opportunities  for  gain  which  attach  to  the  immediate 
possession  of  money  or  currency.  If  observation  shows  that 
goods  purchasable  later  at  no  appreciable  change  in  price 
take  on  a  lower  present  price,  accordingly^  as  the  service  is 
more  and  more  remote  from  the  present,  all  this  may  possibly 
enough  be  explicable  through  the  simple  and  obvious  fact 
that  present  money  commands  a  premium  over  future  money. 
It  is  not  necessarily  to  be  inferred  that  future  goods  other 
than  money  suffer  on  their  own  account  a  discount  rela- 
tively to  present  goods. 

But  however  this  may  be,  —  and  probably  nobody  ac- 
curately knows  or  ever  will  know,  —  the  actual  society  and 
the  men  in  it  are  in  the  money  economy.  Remote  goods  are 
likely  not  to  command  as  high  a  present  price  as  do  present 
goods.  So  much  is  clear ;  so  much  must  be  admitted  as 
true  in  the  large  and  in  the  general  average,  even  though  the 
exceptions  should  seem  to  be  numerous.  INIany  of  these 
exceptions,  however,  are  a  mere  seeming.  For  example,  it 
will  not  do  to  say  that  keeping  ice  from  winter  to  summer 
is  a  case  illustrative  of  a  larger  value  in  the  future  good  as 
compared  with  the  same  present  good  :  winter  ice  and  sum- 
mer ice  are  not  one  good,  but  two.  So  wheat  is  stored  from 
fall  to  spring  and  apples  from  the  fruit  season  to  the  dry- 
fruit  season,  because  of  changing  conditions  attaching 
changes  of  significance  to  the  goods  in  question.  So,  other 
goods  are  preserved  from  the  time  of  abundance  to  the 
time    of   dearth ;    so   savings   are   made  for  the  needs   of 


CAPITALIZATION  A   PROCESS  221 

old  age  without  any  necessary  attention  to  the  rate 
of  interest.  But  if  a  case  could  be  presented  for  choice, 
free  from  any  disturbing  influence  of  changing  objec- 
tive fact,  or  of  changing  individual  need,  or  of  changing 
individual  provision  against  need,  and  offering  only  one 
point  of  difference,  the  mere  difference  between  now  and 
then,  and  if  every  complication  of  monetary  competitions 
and  monetary  interest  were  excluded,  —  whether  in  this 
assumed  case  the  present  service  would,  with  the  average 
of  men,  outweigh  the  future  service  in  appeal  to  present 
choice,  is  something  which  we  are  not  likely  ever  to  know. 
This  perspective  in  favor  of  the  present  is  clear  with  some 
human  beings ;  children  manifest  it  often,  perhaps  gener- 
ally ;  with  savages,  at  all  events  with  some  of  them,  it  ap- 
pears to  be  characteristic.  But  the  contrary  disposition  is 
not  rare  among  men,  even  where  the  future  makes  no  especial 
demand  as  a  matter  of  mere  safety.  For  anything  that  we 
know,  th6  balance  with  the  average  of  men  may  be  in  favor  of 
the  future  and  its  needs  as  against  the  present  and  its  needs. 

Time  perspective  with  money.  —  What  we  do,  however, 
seem  to  know,  is  that,  when  rendered  over  into  the  denomina- 
tor of  price,  a  future  desirable  fact  commonly  suffers  in 
worth  as  against  a  present  fact  objectively  the  same.  The 
rule  holds  clearly  enough  for  future  dollars  as  against  present 
dollars,  and  for  all  cases  where  the  present  and  future  are 
submitted  to  the  dollar  denominator  and  the  dollar  calculus. 
The  thing  remote  in  time,  when  subjected  to  the  money 
statement,  suffers  in  the  perspective  of  desire  when  rendered 
into  a  present  money  statement,  very  much  as  things  dis- 
tant in  space  suffer  in  the  visual  perspective.  One  is  disposed 
to  pay  less  money  for  the  thing  which  is  to  be  enjoyed  not 
now  but  then.  On  any  other  terms  than  of  a  saving  in 
present  outlay,  one  prefers  not  to  buy  now  but  later.  The 
year-off  service  has  indeed  a  present  money  value,  but  a 
value  which  is  less  by  virtue  of  the  year  of  distance.  There 
is  a  weakening  of  the  disposition  toward  money  payment  — 
a  time  discount  in  money. 

The  rate  of  price  discount.  —  But  how  great  is  the  money 
discount  ?    To  point  out  that  a  good  will,  a  year  hence,  ren- 


222  THE  ECONOMICS  OF  ENTERPRISE 

dor  its  unique  service  does  explain  why  the  good  commands 
a  present  price,  but  gives  no  basis  of  telling  just  what  this 
present  pr'ico  is  to  be,  or  why  it  is  not  greater  or  less  than  it 
is.  Nor  is  it  sufficient  to  know  noio,  were  this  possible,  what 
one  would  now  promise  to  pay  a  year  hence  for  the  service 
then.  Still  less  can  one  person's  total  of  price  in  the  present 
be  directly  deduced  from  a  prospective  series  of  services  or  of 
incomes  scattered  over  many  years.  What  you  would  to-day 
bid  for  the  assignment  to  you  of  the  right  to  receive  one  hun- 
dred dollars  a  year  from  to-day,  is  obviously  to  be  arrived 
at  only  with  knowing  the  degree  in  which,  for  you,  the  future 
money  is  depreciated  or  discredited  or  discounted,  in  terms 
of  present  money,  by  this  fact  of  futurity.  What  is  the 
rate  at  which,  in  terms  of  present  dollars,  the  future  dollars 
suffer  in  your  estimation?  What  is  your  angle  of  perspec- 
tive? On  what  basis  of  computation  do  you  translate  the 
year-away  fact  into  a  present  equivalent?  What  is  the  in- 
terest rate  by  which,  in  your  personal  discounting  process, 
you  place  a  present  worth  in  dollars  upon  a  sum  of  future 
dollars  ? 

The  individual  problem.  —  Note  accurately  what  we  have 
before  us  as  our  present  problem,  and  precisely  what  are 
the  terms  involved  in  it.  We  are  dealing  (1)  with  the  money- 
bidding  disposition  of  a  particular  individual ;  (2)  with  a 
definite  sum  of  money  —  say,  100  dollars  —  to  be  received 
at  a  definite  future  time  in  one  payment ;  (3)  with  the  rate 
of  discount  applied  to  the  case  by  this  particular  individual. 
The  amount,  the  date,  and  the  rate  all  being  kno^\Ti,  all  is 
known  that  is  necessary  for  deducing  the  paying  or  bidding 
disposition  of  the  particular  individual.  But  note  also  that, 
in  so  far  as  this  SlOO  is  not  certain  but  contingent,  there  is  a 
further  allowance  to  be  made,  an  allowance  which  must  differ 
with  different  individuals.  Men  differ  widely  in  the  dis- 
position to  accept  risks  and  in  the  appraisal  which  they  apply 
to  risks. 

If,  however,  the  case  in  hand  is  one,  not  of  a  sum  of  money 
payable  at  one  time  certain,  but  a  series  of  sums  payable 
each  at  its  respective  time,  an  annuity,  the  problem  measur- 
ably changes,  though  not  in  its  essential  aspects.     The  in- 


CAPITALIZATION  A   PROCESS  223 

dividual's  bid  appears  now  to  be  more  like  a  composite 
or  total  of  a  number  of  different  present  worths.  One 
man  may  especially  favor  the  early  installments  and 
give  them  a  relatively  high  present  estimate  in  mak- 
ing up  his  total  bid,  the  while  regarding  the  remoter 
installments  less  cordially  and  subjecting  them  to  a  more 
severe  marking  down.  Other  men  may,  for  reasons  peculiar 
to  their  situations  or  dispositions,  discredit  the  earlier  pay- 
ments at  a  higher  annual  rate  than  the  later.  Some  invest- 
ors are  looking  for  long-time  loans  and  some  for  short. 
Each  individual  has  his  own  peculiar  limitations  upon  his 
total  immediate  fund  for  investment,  —  his  own  peculiar 
stress  of  present  need,  his  own  peculiar  forecast  of  the  time 
and  amount  and  severity  of  his  future  needs,  his  own  pe- 
culiar prospects  of  future  plenty  or  of  future  lack.  But 
each  arrives  finally  at  his  total  present  bid  for  the  series  of 
payments,  the  annuity  under  consideration.  And  equally 
whether  the  annuity  is  one  involving  hazards  of  repudiation 
or  is  free  of  all  taint  of  contingency,  the  different  individuals 
must  always  be  differently  affected,  because  of  the  difference 
in  the  importance  attached  to  safety,  or  of  the  difference  in 
disposition  or  ability  to  accept  and  carry  risks. 

Durable  wealth  as  annuity-bearing.  —  It  is  evident  that 
a  government  bond  amounts  to  a  long-time  or  to  a  perma- 
nent annuity.  Corporate  bonds  promise  a  series  of  annuity 
payments,  ending  with  the  payment  also  of  the  principal 
sum.  Corporate  stocks  are  of  the  same  general  nature,  only 
that  the  aspect  of  contingency  is  much  more  pronounced. 
All  of  the  foregoing  render  their  incomes  —  so  far  as  there 
are  any  —  in  terms  of  future  money,  and  present  the  prob- 
lem of  reduction  to  terms  of  present  money.  The  objective 
fact  of  money  income  to  be  received  is  the  same  for  all  of 
these  investments ;  in  this  aspect  there  is  no  room  for  in- 
dividual estimates  or  interpretations.  In  this  regard,  all 
stand  on  the  same  and  ultimate  basis  of  future  dollars, 
to  be  transferred  into  present  dollars.  Thus  the  different 
bids  —  and  different  bids  there  inevitably  will  be  —  must 
find  their  explanation  in  the  differences  of  opinion  as  to  the 


224  THE  ECOXOMICS  OF  ENTERPRISE 

degree  of  hazard,  or  in  tlio  difTorinp;  dispositions  to  operate 
in  hazards  or,  finally,  in  the  dilTerent  ratios  by  which  future 
dollars  that  are  certain  suffer  depreciation  when  rendered 
over  into  terras  of  present  dollars. 

Not  so,  however,  with  respect  to  the  income  from  other 
kinds  of  durable  wealth.  A  dwelling  house,  a  horse,  a  pic- 
ture, a  piano,  a  farm,  is  a  bearer  of  rent,  and  the  purchase 
of  it  is  in  essence  the  purchase  of  an  annuity,  a  series  of  in- 
comes. But  commonly  the  earning  power  of  the  instrumental 
good,  or  the  service  from  a  durable  consumption  good  for  a 
given  period  of  time,  tliffers  with  different  men.  One  man 
can  make  a  particular  instrumental  good  signify  appreciably 
more  than  can  another  man.  Differences  of  equipment 
already  in  hand  may  be  important  here :  A  sheep  farmer 
does  not  need  a  dairy  farm  ;  the  man  with  no  carriage  wants 
no  horses ;  another  man  may  need  a  horse,  but  only  a  horse 
precisely  matching  one  that  he  has  already.  Likewise,  a 
particular  picture  or  piano  may  quite  suit  the  tastes  of  one 
man,  or  may,  in  quality  of  service,  be  especially  well  suited 
to  the  limitations  of  his  purse  or  to  the  size  of  his  fund  avail- 
able for  the  things  of  art,  or  may  especially  well,  or  especially 
ill,  harmonize  with  the  tint  of  his  wall  paper  or  with  the 
style  or  color  of  his  furniture.  All  sorts  of  influences  are, 
then,  to  be  recognized  as  effective  in  varying  the  money 
rentals  attributed  by  different  men  to  the  same  objective  rent- 
bearing  fact.  And,  in  the  degree  that  the  influence  in  ques- 
tion affects  the  prospective  income  in  terms  of  money,  it 
inevitably  affects  the  bids  of  prospective  bidders  and  the 
reservation  prices  of  prospective  sellers.  And  it  is  only  as 
bearing  upon  these  present  money  worths  that  any  of  the 
influences  under  analysis  —  fixed  money  income,  contin- 
gent money  income,  estimated  earning  power,  quality  and 
kind  of  satisfactions  promised,  each  individual  estimate 
placed  upon  these,  the  different  individual  provisions  of 
purchasing  power,  the  different  individual  fields  of  alterna- 
tive investment  or  of  alternative  expenditure — may  come  to 
bear  upon  the  prices  which  the  market  attaches  to  any 
good  as  the  present  and  aggregate  worth  of  its  entire  series 
of  future  valuable  services. 


CAPITALIZATION   A   PROCESS  225 

What  influences  affect  the  various  bidders'  bids.  —  The  truth, 
then,  is  that  it  is  only  in  point  of  the  influences  lying  behind  the 
different  bids  in  the  demand  schedule  and  determining  these  bids, 
that  the  theory  of  price  for  durable  goods  differs  from  the  ordinary 
price  theory,  or  makes  addition  to  it,  or  modification  of  it.  The 
view,  here  presented,  must,  however,  be  admitted.to  diverge  seriously, 
at  some  points,  from  the  currently  held  doctrine  of  the  precise  nature 
of  the  capitalization  process.  Thus  for  a  thorough  understanding 
of  the  issues  involved,  the  generally  accepted  doctrine  must  be 
presented. 

First,  however,  it  is  to  be  remarked  that  the  contrasted  views 
are  in  essential  harmony  to  the  extent  of  holding  that,  in  a  large 
and  general  way,  some  sort  of  capitalization  process  must  be  ap- 
pealed to  in  the  explanation  of  the  present  worth, — the  cash  price, 
—  of  any  sort  of  durable  good,  and  that  there  is  one  and  the  same 
process  for  durable  production  goods  and  for  durable  consumption 
goods.  The  points  at  issue  have  to  do  with  the  precise  nature  of 
this  process. 

The  current  view.  — ■  Put  shortly,  the  view  which  is  currently 
received  holds  that,  with  passing  time,  there  accrues  upon  any 
durable  good  —  a  house  or  a  machine,  for  example  —  a  market 
rental,  say  of  $100  a  year,  for  a  certain  term  of  years.  If  the  rentals 
or  hires  are  10  in  number,  the  present  worth  is  reached  by  discount- 
ing, at  the  market  rate  of  interest  proper  to  the  case,  each  of  these 
payments  into  a  present  market  price.  The  market  price  of  the 
property  is  the  sum  of  the  present  worths  of  these  future  market 
incomes.  If  a  property  promise  an  unending  series  of  rentals,  the 
price  will  be  that  sum  of  money  which,  put  at  interest  at  the  ac- 
cepted capitalization  —  or  discount  —  rate,  will  annually  produce 
the  rental  under  consideration.  Thus,  no  matter  what  influences 
may  be  beliind  the  determination  of  the  respective  rents  of  produc- 
tion and  consumption  goods,  these  rents,  when  once  determined, 
fall  under  one  and  the  same  capitalization  process  in  attaining  to  a 
present  worth.  So,  if  the  rent  of  a  house  or  a  farm  or  a  machine, 
after  allowing  for  upkeep  and  repairs,  is  $100  annually,  the  market 
price  in  a  10  per  cent  country  will  be  $1000.  With  an  unchanged 
annual  earning  power,  as  rent  or  hire,  but  with  the  interest  rate  at 
5  per  cent,  the  same  property  will  be  worth  $2000. 

The  points  at  issue.  — ■  Note  now  that  fundamental  to  this  analysis 
is  a  market  rental  and  a  market  rate  of  discount.  If  the  good  is  not  a 
rented  good,  appeal  is  made  to  what  the  good  would  command  as  a 
market  fact  at  the  market  rental. 

No  question  can  be  made  that  goods  do  command  —  many  of 
Q 


226  THE  ECQXOMICS  OF  ENTERPRISE 

them  —  market  rentals,  and  that  most  other  goods  valuable  to  the 
owner  would,  if  rented,  command  such  rentals.  Nor  has  the  prob- 
lem of  the  distributive  process  by  which  these  rents  are  imputed 
to  the  goods  any  necessary  part  in  the  capitalization  analysis. 
Doubtless  there  are  such  market  rents.  But  the  point  is  that 
these  market  rents  are  not  the  rents  with  which  the  capitalization  proc- 
ess has  to  do.  The  view  contended  for  diverges,  then,  from  the 
accepted  view  in  two  respects  only  —  in  holding  (1)  that  not  one 
market  earning  power,  but  the  different  earning  powers  to  the  dif- 
ferent individuals,  most  motivate  the  respective  indi\idual  price 
offers ;  (2)  that  not  the  market  rate  of  discount,  but  the  different 
rates  of  discount  of  the  different  individuals,  must  be  the  rates 
—  if  any  rates  there  are  —  by  which  the  respective  earning  powers 
are  discounted  into  the  different  individual  price  offers. 

These  issues  should  be  clear,  and,  if  clear,  should  be  readily  re- 
solved. The  question  really  is,  what  lies  behind  the  individual 
fanner's  disposition  to  pay,  say,  $200  for  a  harvest  machine.  This 
farmer's  minimum  price  offer  stands  as  a  S200  demand  item  in  the 
aggregate  demand  curve.  Why?  Is  it  that  this  machine  rents,  or 
is  rentable,  at  $10  net  per  year,  and  that  the  market  rate  of  dis- 
count is  5  per  cent  ?  It  maj^  equally  well  be  true  that  for  him,  upon 
his  particular  farm  and  in  his  peculiar  circumstances,  a  harvester 
would  count  for  an  added  gain  of  $20  per  j^ear ;  but  that,  at  the 
same  time,  the  sum  to  be  invested  is  worth  to  him  10  per  cent  if  he 
owns  it,  or  would  cost  him  10  per  cent  were  he  to  borrow  it. 

With  durable  consumption  goods  also,  the  argument  is  parallel. 
Men  are  willing  to  offer  for  things  as  a  maximum  what  they  think 
they  can  afford.  But  what  is  it  to  "  afford  "?  As  with  goods  im- 
mediately consumable,  wheat  or  butter  or  stove  wood,  so  also  with 
durable  consumption  goods,  there  are  as  many  different  paying 
dispositions  as  there  are  different  men.  All  of  these  different  pajdng 
dispositions,  say  for  stove  wood,  are  items  in  the  demand  column. 
Commonl}',  in  fact,  an  individual  has  several  different  price  offers 
for  different  increments  of  supply ;  that  is  to  say,  the  indi\'iduars 
different  price  offers  appear  at  different  points  along  down  the  de- 
mand curve  or  column.  The  price  of  the  wheat  or  of  the  butter  or 
of  the  wood  is  the  equating  point  between  the  whole  supply  of  it  as 
over  against  all  the  different  price  offers  bearing  upon  it.  In  short, 
there  must  be  recognized  for  immediate  consumption  goods,  for 
durable  consumption  goods,  and  for  durable  production  goods, 
a  price  offer  schedule,  a  demand  curve,  made  up  of  many  different 
price  paying  dispositions.     It  will  not  do  to  assume  that  any  dur- 


CAPITALIZATION  A   PROCESS  227 

able  good  has  one  single  demand  price  for  all  intending  buyers, 
deduced  from  one  single  rental  value,  and  subjected  to  one  single 
discount  rate  in  arriving  at  a  market  price. 

It  is  in  this  aspect  that  the  earlier  analysis  of  the  process  by 
which  a  market  rental  is  imputed  to  a  productive  good  is  to  our  im- 
mediate purpose  as  making  clear  that  the  productivity  to  different 
entrepreneurs  is  a  different  productivity.  Assuming  an  aggregate 
supply  of  goods,  each  item  of  which  controls  a  series  of  valuable 
services  for  each  individual  entrepreneur,  and  subjecting  these 
different  incomes  of  service  to  the  different  discount  rates  of  the 
respective  entrepreneurs,  we  are  in  possession  of  the  data  from  which 
the  different  demand  prices  of  the  different  entrepreneurs  and  the 
reservation  prices  of  the  possessors  are  deduced  —  the  key  to  the 
derivation  of  all  the  different  demands  bearing  upon  the  supply. 

The  current  doctrine  unprecise.  —  The  analysis  here  offered  im- 
ports, therefore,  no  denial  of  the  vague  general  truth  at  the  heart  of 
the  doctrine  of  capitalization  now  under  criticism  —  a  doctrine  not 
so  much  wrong  in  essentials  as  inaccurate  and  incomplete  in  its 
details.  Its  defect  is  that  it  speaks  in  general  averages  or,  possi- 
bly, conceives  society  to  be  an  economic  organism,  or,  perhaps, 
adopts  the  attitude  of  the  broker  or  speculator  who,  rightly  for 
his  purposes,  computes  the  value  of  any  share  of  stock  according  to 
the  income  rate  which  it  renders,  subject  to  a  discount  rate  express- 
ing the  earning  power  of  investments  in  similar  stocks.  The  broker 
applies,  in  truth,  a  very  simple  and  entirely  adequate,  but  a  purely 
representative  and  secondary,  method  of  arriving  at  his  own  dis- 
count rate.  He  has  no  concern  with  the  forces  determining  the 
various  personal  discount  rates  of  the  various  purchasers  of  the  prop- 
erties he  offers  for  sale  —  just  as  the  merchant  is  not  concerned 
with  the  volume  or  the  size  of  the  marginal  utihties  between  which 
the  individual  consumer  must  choose  in  arriving  at  his  demand 
price  for  any  particular  consumable  good.  The  actual  market 
situation  affords  data  enough  for  the  purposes  of  either  of  these 
middlemen.  —  Our  concern,  however,  is  with  the  processes  of  the 
ultimate  investor  or  consumer. 

Both  views  over-rationalized.  —  But  the  truth  probably 
is  that,  excepting  in  those  cases  where  specific  future  money 
incomes  are  rendered  over  into  a  present  money  worth,  either 
of  the  contrasted  views  is  about  equally  open  to  criticism. 
Both  seriously  err  in  an  extreme  over-rationalization  of  the 


228  THE  ECONOMICS  OF  ENTERPRISE 

psychological  process  involved.  How  far,  indeed,  does  the 
individual  actually  proceed  in  his  logical  analysis  of  the 
situation,  and  what  does  he  actually  do  in  deciding  how  much 
money  he  can  afft)rd  to  give  for  some  particular  long-time 
consumption  good,  say  a  piano?  There  are  other  ways  in 
which  he  may  use  his  S500 ;  if  he  does  not  buy  the  piano,  he 
will  presumably  scatter  his  $500  among  a  wide  range  of  little 
things.  His  choice  in  such  case  lies  between  the  aggregate 
utilities  of  these  many  and  indefinite  things,  as  over  against 
a  vague  vista  of  piano  utilities.  There  is  no  need  for  a  greater 
rationality  in  the  case  than  that  he  realize  the  quality  proper 
to  the  dollar  everywhere  —  that  it  can  be  spent  only  once, 
and  that  he  make  a  choice  declarative  of  which  line  of  alter- 
natives attracts  him  the  more.  If  the  prospective  buyer 
of  the  piano  is  in  debt  and  is  paying  interest,  or  if  he  is  at 
choice  between  an  investment  for  gain  as  against  the  pur- 
chase of  the  piano  —  if,  that  is  to  say,  the  piano  vista  of 
services  is  set  over  against  a  money  magnitude  and  an  in- 
terest gain  —  is  there  any  need  that  the  series  of  services 
controlled  and  promised  by  the  piano  be  subjected  each  to 
its  future  valuation  in  terms  of  a  price  statement  as  of  a 
specific  future  time,  and  then  that  each  be  rendered  over 
into  a  price  worth  in  the  present,  and  thereupon  a  total  of 
these  separate  worths  be  arrived  at  as  the  aggregate  present 
worth  of  the  piano  ?  This  would  certainly  be  one  way  of  capi- 
talizing, but  is  it  the  only  way,  and  is  it  the  actual  way? 

The  principle  of  present  worth.  —  What,  indeed,  is  the 
principle  of  the  entire  doctrine  of  present  worth  ?  One  thou- 
sand dollars,  due  one  year  from  date,  is,  as  a  present  worth, 
merely  the  amount  of  money  which,  put  at  interest  at  the 
assumed  rate,  will  in  a  year  amount  to  1000  dollars.  So,  again, 
the  present  worth  of  a  permanent  annuity  is  that  sum  of  money 
which,  put  at  interest  at  the  assumed  rate,  will  return  the 
annuity  pajTnents.  If  the  interest  rate  is  taken  at 6  per  cent, 
a  permanent  annuity  of  60  dollars  is  worth  1000  dollars, 
because  1000  dollars  at  interest  at  6  per  cent  will  give  a 
yearly  return  of  60  dollars.  This  is  what  present  worth 
means,  and  this  is  all  that  it  means  —  the  equivalent  in  cash 
of  an  item,  or  a  series  of  items,  of  future  income. 


CAPITALIZATION  A   PROCESS  229 

In  the  light  of  this  principle,  what  shall  a  man  pay  in 
cash  for  a  series  of  services  extending  into  the  future  ?  The 
outside  limit  is  evidently  reached  when  the  point  comes  at 
which  the  same  sum  can  be  equally  serviceably  used  in  the 
purchase  of  other  goods,  or  in  gainful  investment  in  some 
direction  commanding  an  equally  desirable  money  return. 
The  ultimate  principle  in  the  case  is  really  a  simple  appli- 
cation of  the  doctrine  of  opportunity  cost.  If  the  choice 
actually  lies  between  the  piano  and  the  placing  of  the  money 
at  interest,  the  piano  will  be  purchased  only  when  its  pro- 
spective services  are  as  attractive  as  the  prospective  returns 
upon  the  investment  bearing  the  money  return.  To  pay 
500  dollars  for  the  piano  implies  that  the  present  importance 
attached  to  its  series  of  prospective  services  is  not  less  than 
the  importance  of  the  500  dollars  in  its  alternative  applica- 
tion as  an  investment  promising  a  pecuniary  return. 

A  present  thing  desired  now  for  its  future  service  has 
present  utility.  —  Recall  that  any  bidding  or  paying  dis- 
position expresses  a  choice  between  competing  utilities  and 
is  a  declaration  in  favor  of  that  one  bulking  the  greater  in 
the  present  estimation.  Recall  also  the  meaning  of  utility 
in  its  strict  economic  significance :  it  is  the  strength  of  the 
appeal  to  choice ;  it  expresses  merely  the  fact  that  a  thing 
is  wanted.  To  say  that  a  thing  has  great  utility  is  merely 
to  say  that  it  is  wanted  greatly,  that  it  evokes  a  strong  in- 
tensity of  desire.  Accurately,  we  do  not  want  things  because 
they  have  utility,  but  their  utility  is  merely  this  very  fact 
that  we  want  them.  To  say  that  the  utility  is  the  cause 
of  the  want,  or  that  we  desire  things  because  they  give  us 
pleasure,  is  essentially  repetitive ;  as  well  say  that  some- 
thing hurts  us  because  it  pains  us,  or  that  fire  burns  us  because 
it  is  hot  to  us.  So  to  assert  that  thmgs  will  later  satisfy  a 
desire  —  that  we  shall  some  day  want  them,  that  we  now 
see  that  they  will  some  day  be  desired  —  is  equivalent  to 
saying  that  they  are  now  desired,  that  we  do  now  want 
them,  that  they  now  have  utility.  For  the  purpose,  there- 
fore, it  means  nothing  to  inquire  whether  a  future  good  is  a 
present  good,  whether  the  thing  of  appreciated  future  serv- 
ice has  present  utility,  or  whether,  instead,  it  merely  prompts 


230  THE  ECONOMICS  OF  ENTERPRISE 

a  present  estimation  of  a  future  utility.  If  the  future  serv- 
ice calls  forth  a  present  desire  to  have  the  thing,  the  thing 
has  utility  now ;  a  present  want  exists  for  it :  it  evokes  a 
present  desire.  The  degree  in  which  the  future  service 
excites  the  present  want  is  the  degree  of  the  present  utility. 
The  discount  principle  connotes,  then,  merely  the  degree 
in  which  the  remoteness  of  the  services  detracts  from  the 
intensity  of  the  present  want  —  much  if  much,  little  if  little, 
and  very  possibly,  in  some  circumstances,  not  at  all.  Only 
in  the  degree,  then,  in  which  remoteness  signifies  in  any  par- 
ticular case,  if  it  signifies  at  all,  is  remoteness  important  to 
the  present  analysis ;  and  it  is  then  important  only  as  bear- 
ing on  the  price  which  will  be  offered  for  the  remote  thing, 
as  against  the  strongest  competing  opportunity  for  the  use 
of  the  purchasing  power.  The  importance  of  remoteness 
is  merely  in  its  effect  upon  the  relative  strength  of  the  oppos- 
ing present  wants  for  alternative  things. 

The  present  discussion  will  serve  again  to  emphasize  the  fact  that 
economic  analysis  need  not  attempt  the  solution  of  all,  or  of  any,  of 
the  difficult  psj^chological  problems  connected  with  the  theory  of 
desire,  and  cannot  safely  commit  itself  to  any  particular  school  or 
method  of  solution.  It  is  enough  for  all  economic  purposes  that 
these  desires  exist,  that  these  wants  are  -with  us,  that  these  utilities 
are.  We  have  merely  to  report  the  manner  of  their  working  as  they 
affect  the  disposition  to  pay,  and  thereby  affect  the  fixation  of  price. 

Our  present  problem,  it  must  also  be  noted,  is  not  at  all  to  in- 
vestigate the  causes  of  the  prevailing  rate  or  of  the  different  rates  of 
interest  in  the  market,  or  even  to  investigate  the  causes  of  that 
particular  rate  which  is  employed  by  the  indi\adual  in  arri\'ing  at  a 
present  money  bid  for  a  future  specific  money  income  or  series  of 
incomes.  We  have  merely  at  present  to  distinguish  clearly  the 
terms  of  the  problem,  (1)  the  rents  or  the  payments  to  accrue,  and 
(2)  the  degree  of  discount  to  which  these  are  subject,  separately  or 
together,  in  getting  them  into  an  indi\'iduars  present  price  bid. 
And  together  with  this,  we  have  to  make  clear  the  substantially 
similar  process,  as  it  applies  to  those  other  long-time  production  or 
consumption  goods  to  which  the  same  definiteness  of  income  does 
not  fully  attach.  And  to  this  end,  we  are  compelled  to  recognize 
and  emphasize  the  fact  that  interest  and  discount  are,  in  their  strict 


CAPITALIZATION  A   PROCESS  231 

and  limited  sense,  phenomena  which  belong  solely  to  the  price  econ- 
omy and  are  proper  only  to  money  relations.  They  are  competitive 
phenomena  in  the  price  regime.  To  render  a  future  money  pay- 
ment over  into  a  present  money  worth  is  essentially  a  discounting 
process  in  the  strictest  sense  of  the  term,  even  though  the  process 
presents  itself  as  merely  the  determination  of  what  sum  of  present 
money  is  of  equal  desirability  with  the  future  services  in  prospect, 
—  even  though,  that  is  to  say,  no  definite  discount  rate  and  no  pre- 
cise method  of  computation  attend  the  process.  The  facts  of  the 
case,  and  all  the  necessary  psychology  of  it,  are  summed  up  in  the 
conclusion  that  the  bidder  can  be  prevailed  upon  to  offer  only 
this  much  now  for  that  much  then.  Possibly  enough,  he  has  no 
reason  beyond  the  fact  that  there  are  open  to  him  alternative 
opportunities  of  investment,  which  alternative  opportunities  may, 
in  turn,  be  equally  unspecific  in  their  mathematical  relations.  Nor 
is  even  this  much  to  be  asserted  of  the  process  by  which  he  arrives 
at  his  present  buying  disposition,  say,  for  a  piano.  This  piano 
will  forthwith  enter  upon  its  career  of  recurrent  and  frequent,  — • 
though  irregular,  —  offerings  of  service.  Were  the  alternative  to 
the  buying  of  a  piano  the  renting  of  another  piano  —  at,  say,  3 
dollars  per  month  —  he  might,  it  is  true,  arrive  at  the  decision  to 
purchase  through  some  more  or  less  distinct  use  of  a  mathematical 
process  of  discount.  But  renting  may  well  be  impossible  or  not  in 
contemplation ;  in  that  case,  one  plainly  does  not  attach  a  future 
price  to  each  one  among  all  the  long  series  of  future  valuable  —  but 
not  separately  valued  —  services,  and  thereupon  proceed  to  dis- 
count each  of  these  separately  priceable  items  of  service  into  its 
present  worth  of  price,  and  then  proceed  to  make  up  his  total  bid  as 
the  sum  of  these  different  and  separate  present  worths.  If  this  is 
really  the  logic  of  the  case  —  the  implicit  logic  carried  out  to  its 
ultimate  reach  of  care  and  rationality  —  it  surely  is  not  the  actual 
psychology  of  the  process.  And  yet,  if  the  discount  process  in 
this  separate  and  exhaustively  logical  aspect  is  really  involved,  it 
must  have  to  do  with  these  future  facts  in  their  price-reported 
aspect.  Nothing  but  a  future  value  or  price  can  be  discounted 
into  a  present  value  or  price ;  nothing  but  a  price  can  be  reduced  by 
a  certain  per  cent  to  yield  a  price  remainder. 

But  this  precise  sort  of  discounting  is  not  what  actually  takes 
place.  And  note  again  that  the  problem  in  its  present  formulation 
does  not  involve  the  question  of  the  fixation  of  the  bidder's  interest 
rate,  or  any  question  as  to  when,  where,  and  how  he  gets  this  interest 
rate,  but  rather  the  question  whether  he  actually  has  an  interest  rate 
for  the  purposes  of  the  problem.     Doubtless  he  may,  and  probably 


232  THE  ECOXOMICS  OF  ENTERPRISE 

does,  attach  some  more  or  less  definite  significance  to  the  use  of  his 
funds  for  purposes  of  ?,tun,  whenever  he  has  a  gainful  use  under 
consideration;  he  may  truly  have  and  recognize  alternative  pos- 
sibilities of  gainful  investment  for  price  results ;  or  he  may  be  so 
pressed  by  his  other  wants  as  to  have  a  certain  general  level  of  effec- 
tive protest  against  the  piano  direction  of  outlay.  This  much  must 
be  admitted.  And  surely  he  does  somehow  or  other  decide  that  he 
will  or  will  not  purchase,  and  up  to  what  level  his  price  offer 
may  go.  But,  equally  clearly,  he  does  not  arrive  at  the  decision  by 
the  use  of  any  series  of  separately  valued  services  of  the  piano  as 
the  basis  for  his  price  offer. 

The  capitalization  theory  in  either  of  the  contrasted  idews  is, 
then,  susceptible  of  an  interpretation  which,  if  seriously  held,  would 
carry  the  logic  of  the  capitaUzation  process  to  a  point  of  precision 
and  coherence  of  which  it  is  mostly  innocent ;  rightly  indicating  the 
character  of  the  process  so  far  as  it  goes,  it  would  then  project  it  far 
beyond  the  reach  of  its  ordinary  and  actual  going.  Even,  indeed,  as 
apphed  to  ground  rents,  annuities,  and  stocks  and  bonds,  the  usual 
formulation  of  the  capitalization  theory  severely  strains  the  terms 
of  the  individual  experience,  in  purporting  to  record  in  precise  detail 
the  manner  and  method  by  which  the  durable  good  attains  to  its 
market  standing  in  terms  of  price.  Subjected,  however,  to  the  res- 
ervations and  Umitations  which  have  been  here  set  forth,  the 
theory  appears  to  rest  upon  a  vahd  principle  and  to  illuminate  a 
field  of  phenomena  which  otherwise  must  remain  obscure. 


This  chapter  has  discussed  the  problem  of  attaching  present 
market  prices  to  such  goods  as  promise  future  incomes.  To 
the  end  of  solving  this  problem  it  has  been  shown  that  the 
phenomena  of  interest  and  of  discount  are  essentially  one 
phenomenon  differing  only  in  the  standpoint  of  time  from 
which  the  fact  of  increment  is  viewed ;  that  in  a  pecuniary 
society,  either  is  a  premium  of  present  purchasing  power  in 
terms  of  money  over  future  purchasing  power  in  terms  of 
money ;  that  in  actual  market  transfers,  all  future  money 
incomes  —  or  all  incomes  for  which  money  would  be  paid 
to  have  them  or  foregone  to  retain  them  —  suffer  a  discount 
in  arriving  at  a  present  money  price ;  that  the  process  by 
which  the  present  price  is  fixed  is  the  capitalization  process ; 
that  the  present  money  worth  of  any  future  income  or  of  any 
series  of  incomes  constitutes  capital;    that  the  change  in 


CAPITALIZATION  A   PROCESS  233 

money  worth  with  passing  time  is  one  manifestation  of  in- 
terest —  interest  (or  discount),  capital,  and  capitahzation 
being  therefore  correlative  terms,  and  the  phenomena  in- 
dicated by  them,  interdependent  phenomena ;  that  every 
possession  that  renders  a  valuable  service  remote  in  time,  or 
that  earns  a  series  of  services  accruing  with  lapse  of  time,  is  a 
possession  that  earns  interest,  is  a  possession  that  gets  its 
present  worth  through  the  process  of  capitalization,  and  a 
possession  that  is  capital  to  the  amount  of  its  present  price ; 
that  most  durable  goods  render  not  one  future  income,  but  a 
series  of  incomes ;  that  precisely  because  all  durable  goods 
render  income  which  accrues  with  passing  time  and  de- 
pends for  its  accruing  upon  the  passing  of  time,  all  durable 
goods  are  subject  to  the  capitalization  process  and  are  there- 
fore capital. 

It  is  further  clear  that  the  process  of  market  adjustment  by 
which  the  price  of  any  duraljle  good  is  fixed  is  precisely  the 
same  demand  and  supply  process  that  has  already  been 
studied  with  regard  to  goods  of  immediate  consumption  ;  that 
the  capitalization  process  has  therefore  to  do  neither  with  the 
market  rentals  upon  durable  goods  nor  with  the  market  rates 
of  interest  upon  different  classes  of  loanable  funds,  but  only 
with  the  way  in  which  the  possessors  of  the  goods  arrive  at 
their  reservation  prices,  and  the  bidders  at  their  offer  prices ; 
that,  being  different  men,  the  buyers  differ  from  the  sellers  and 
from  one  another,  and  the  sellers  from  one  another ;  that 
therefore  there  can  be  no  one  single  series  of  earning  powers 
attaching  to  any  good,  which  series  of  earning  powers  is  capi- 
talized into  the  present  market  worth  of  the  good,  but  rather 
that  there  is  a  different  earning  power  for  each  different  seller 
and  buyer ;  that  each  seller  or  buyer  has  also  his  separate  dis- 
count rate  and  his  separate  process  through  which  he  arrives 
at  his  individual  present  worth  of  any  future  income,  and  his 
maximum  bid  for  it ;  that  therefore  individual  capitalizing 
processes  underlie  both  the  demand  and  the  supply  schedules 
of  the  market  process ;  and  that  thus  the  market  process,  if 
made  both  actual  and  intelligible,  is  not  to  be  analyzed  as  a 
social  or  aggregate  or  organic  process,  but  must  instead  be 
strictly  and  thoroughly  individualized. 

And  further  still :  the  doctrine  of  capitalization  here  pre- 
sented bases  itself  upon  the  individual  processes  lying  behind 
the  reservation  prices  of  the  sellers  and  the  bidding  prices  of 
the  buyers.     The  analysis  must  therefore  be  psychological 


234  THE  ECONOMICS  OF  ENTERPRISE 

ratluT  than  logical  in  (>nipluisis,  and  must  carefully  avoid 
interpreting  the  indiviilual  process  in  terms  wiiich,  while 
logically  possible,  are  not  j)sychologically  actual ;  it  must 
recognize  that  behind  capital  as  a  present  market  fact  there 
are  individual  attitudes  and  ]irocesses  having  to  do  with  both 
a  future  and  a  present,  and  with  the  relations  of  future  to 
present ;  that  discount  is  precisely  a  process  of  translating 
the  future  price  items  into  present  price  items ;  that  psy- 
chologically there  must  therefore  be  an  actual  present,  and 
incomes  which  accrue  in  this  present ;  that,  admitting  freely 
that  there  is  no  logical  present,  but  only  an  eternity  past  and 
an  eternity  to  come,  and  that  therefore  there  can  logically  be 
no  present  incomes,  but  only  future  incomes  more  or  less  re- 
mote from  a  present  which  logically  is  not,  there  must  never- 
theless be  an  actual  psychological  present,  merely  —  if  for 
no  other  sufficient  reason  —  because  there  are  present  worths 
and  derivative  present  market  prices ;  that  the  process  of 
capitalization  is  the  process  of  getting  the  psychological  future 
into  an  actual  and  psychological  and  market  present ;  and 
that,  in  the  individual  process,  only  those  incomes  get  capi- 
talized which,  being  recognized  as  future,  get  discounted  into 
a  present  paying  disposition.  Capital,  therefore,  does  not 
embrace  all  goods  commanding  a  price  —  ice  cream  for  ex- 
ample —  but  only  those  goods  which,  recognized  as  future 
in  some  part  of  their  service,  involve  the  process  of  discount 
in  arriving  at  their  present  market  standing. 

Chapter  XVI  will  show  that  every  contract  of  deferred 
payment  is  precisely  what  the  name  suggests  —  a  contract 
for  future  payment  as  substitute  for  immediate  payment ; 
but  that  actually,  and  almost  necessarily,  the  contract  runs 
to  pay  a  sum  of  money,  as  the  agreed  equivalent  of  the  sum 
for  which  the  debtor  was  originally  accountable ;  that  the 
contract  of  deferred  payment  is  merely  an  exchange  of  pres- 
ent price  for  a  promised  future  price  —  a  transaction  in 
money  terms,  in  which  the  change  in  the  money  sum  is  due 
to  the  lapse  of  time  between  the  date  of  original  accountabil- 
ity and  the  date  of  the  actual  payment.  The  present  sum  is 
the  agreed  discounted  price  of  the  future  sum.  Thus  the  phe- 
nomena of  interest  and  capitalization  and  capital  are  all  pres- 
ent in  every  relation  of  deferred  payment. 

Commonly,  however,  not  all  of  these  three  aspects  are 
specifically  set  forth  in  the  terms  of  the  contract :  in  the  ab- 


CAPITALIZATION   A   PROCESS  235 

sence  of  any  specific  agreement  for  the  payment  of  interest, 
the  laws  or  the  customs  of  society  attach  to  every  obligation 
to  pay  immediate  money  the  further  agreement  that  if  pay- 
ment is  not  immediately  made,  the  deferred  payment  shall 
include  a  sum  in  addition  to  the  principal  as  indemnity  to  the 
creditor  for  the  delay. 

The  chapter  will,  however,  concern  itself  not  with  the  in- 
terest process  by  which  an  equation  is  established  between 
future  money  and  present  money,  but  solely  with  the  pay- 
ment made  in  discharge  of  the  principal  sum ;  the  problem 
will  be  to  determine  the  precise  nature  of  the  obligation  of 
deferred  payment  with  reference  solely  to  the  principal  sum ; 
to  outline  the  requirements  which  strict  and  ideal  justice 
would  attach  to  the  relation ;  the  rights  which,  in  order  to 
safeguard  the  interests  of  both  debtor  and  creditor,  the  law 
should  attach  to  the  contract ;  and  the  nature  of  the  modi- 
fications which  the  law  should  read  into  the  contract  in  its 
making  or  should  impose  in  its  execution. 


CHAPTER  XVI 

THE    DISCHARGE    OF    DEBTS  :    DEFERRED    PAYMENTS 

The  present  chapter  will  attempt  to  establish,  among  others, 
the  following  propositions : 

(1)  That  if  credit  relations  arc  to  exist,  the  use  of  a  standard  of 
deferred  payments  is  a  necessity ; 

(2)  That  it  is  practicablj^  inevitable  that  the  medium  through 
which  current  exchanges  take  place,  namely,  money  or  its  equivalent, 
should  be  the  medium  in  which  deferred  payments  are  stipulated ; 

(3)  That  wliether  the  medium  be  stable  or  unstable  is  important 
only  in  relations  of  deferred  payment,  or  in  relations  essentially 
similar ; 

(4)  That  money  must  be  a  defective  standard  of  deferred  pay- 
ments because  of  its  inevitable  instability  —  because,  in  other  words, 
it  does  not  promise  an  equality  between  the  loan  as  made  and  the 
loan  as  repaid ; 

(5)  That  neither  the  instability  to  be  avoided  in  the  standard, 
nor  the  equality  to  be  sought  through  the  standard,  can  have  any 
reference  to  value ;  nor  can  this  stability  or  this  equality  find  its 
test  in  labor  or  pain  or  sacrifice,  but  only  in  utihty. 

Value  expresses  any  one  specific  exchange  relation.  —  The 
market  value  of  any  given  thing  is  the  exchange  relation  in  which, 
quantitatively  stated,  it  stands  to  some  other  one  thing,  quantita- 
tively stated  —  not  wheat  against  corn  or  hay  against  pepper,  but 
only  that  so  much  of  a  particular  grade  of  wheat  buys  so  much  of 
corn  of  a  particular  grade  — ■  so  many  bales  or  pounds  of  hay  of  a 
specific  sort  buy  so  many  pounds  or  packages  of  pepper  of  a 
specific  sort.  In  other  words,  value  reports  an  exchange  relation  of 
any  one  thing  against  some  other  one  thing.  Price  reports  the  rela- 
tion in  which  some  one  thing  actually  exchanges  against  the 
particular  thing  used  as  money.  Price,  therefore,  is  one  instance 
of  value  —  the  exchange  relation  of  any  particular  good  to  the  spe- 
cific thing  money. 

Barter  exchange  and  price  exchange.  —  In  a  barter  economy, 
therefore,  all  price  relations  would  be  lacking.  In  the  money  econ- 
omy, on  the  contrary,  all  value  exchanges  must  be  lacking,  excepting 

236 


THE  DISCHARGE  OF  DEBTS  237 

so  far  as  barter  lasts  over  into  the  new  order.  But  value  relations 
must  still  exist  even  though  value  exchanges  have  entirely  ceased. 
Exchanges  of  one  good  for  another  do  essentially  take  place,  only  that 
they  take  place  through  a' medium,  a  price  good,  a  money.  Hats 
for  money,  and  money  for  shoes,  amounts  to  hats  for  shoes.  An 
exchange  for  money  is  only  the  halfway  house  to  a  completed  barter. 
The  actual  exchanges  in  a  price  economy  are  of  this  halfway  charac- 
ter. Thus,  all  value  relations  must  be  deductions  from  actual  price 
relations.  By  comparing  the  relation  of  wheat  to  money,  its  price, 
and  the  relation  of  shoes  to  money,  their  price,  the  value  relations  of 
wheat  to  shoes  are  computed  —  not  actual  exchange  relations,  for 
these  are  impracticable  —  but  potential  relations  in  the  sense  either  of 
those  exchange  relations  which  would  exist,  did  any  barter  exchanges 
actually  take  place,  or  in  the  sense  of  those  ultimate  barter  relations 
which  the  use  of  a  medium  of  exchange  makes  easily  practicable. 

Exchange  media  and  specialization.  —  It  is  obvious  that  in  a 
society  lacking  any  established  medium  of  exchange,  division  of 
labor  and  specialization  of  employment  might  exist  very  much  as  in 
the  present  society.  Fairly  definite  value  relations  would  establish 
themselves  between  such  classes  of  goods  as  were  in  considerable 
measure  exchanged  against  one  another.  But  the  absence  of  a 
.system  of  money  and  of  price  would  not  mean  that  there  would  be 
no  medium  of  exchange,  but  rather  that  there  would  be  an  indefinite 
multiplication  of  media.  By  trading  and  retrading,  the  possessor 
of  any  commodity  for  exchange  would  finally  get  possession  of  that 
particular  commodity  which  he  could  exchange  for  the  particular 
thing  that  he  wanted.  The  inconveniences  in  the  barter  system 
would  inhere  in  just  this  necessity  of  so  many  intermediate  trades 
and  in  the  practical  difficulty  of  working  out  any  particular  series  of 
these.  Each  man  would  then,  as  his  necessities  should  dicate,  be 
employing  not  one  medium,  but  various  different  media  of  exchange, 
as  intermediate  between  his  original  wares  for  sale  and  the  consump- 
tion goods  which  he  was  seeking ;  but  these  intermediates  would  be 
different  for  different  men,  and  different  for  each  exchange  problem, 
and  different  at  each  of  the  stages  of  each  separate  problem. 

Money  exchange.  —  The  need,  therefore,  of  one  established 
medium  is  evident.  A  money  economy  means  merely  that  some  one 
particular  commodity  has  been  specialized  to  the  intermediate 
function  and  is  generally  accepted  in  that  function.  This  general 
intermediate  is  money ;  trades  through  it  are  price  trades ;  a  stand- 
ard is  thus  estabhshed ;  from  the  different  exchange  ratios  of  com- 
modities to  money,  their  different  prices,  value  relations  may  be 
deduced  for  goods  that  never  meet  in  actual  exchanges. 


238  THE  ECONOMICS  OF  ENTERFIilSE 

In  all  trades,  therefore,  whk-h  are  not  barter  trades  an  intermedi- 
ate must  serve  as  price  medium  and  as  standartl.  Price  is  merely 
the  money  quid-pro-quo,  the  payment  side  of  an  exchange.  But 
if  the  payment  be  not  inunediate,  if  credit  be  granted,  in  terms  of 
what  obligation  shall  it  run?  Inevitably  there  must  be  a  something 
promised  as  the  thing  in  which  to  make  payment.  Tlie  thing  actu- 
ally selected  is  in  every  case  the  standard  for  that  case.  If  the 
exchange  had  been  completed  in  the  present,  and  at  the  same  time 
were  not  a  barter  exchange,  an  intermediate  —  a  standard  for  the 
occasion  —  would  have  been  necessary.  So,  if  the  exchange  be  not 
a  barter  exchange,  and  pajiiient  be  delayed,  the  intermediate  thing 
must  be  a  standard  for  that  occasion.  What  standard  will  serve 
this  particular  need  ? 

The  standard  in  deferred  payments.  —  Evidently  the  very 
thing  that  was  sold  can  hardly  be  the  particular  thing  that 
the  creditor  will  desire  as  payment.  A  farmer  who  sells  hay 
does  not  -want  hay  in  return ;  his  business  is  producing  hay 
for  sale.  One  ordinarily  sells  things  because  he  wants  some- 
thing else,  just  as  one  ordinarily  buys  the  thing  that  he  does 
not  produce.  And  if  hay  were  in  fact  agreed  upon  as  the 
thing  in  which  payment  should  be  made,  the  hay  would  then 
itself  be  the  standard  for  that  case.  \Miatever  is  agreed 
upon  as  the  particular  thing  in  W'hich  payment  shall  be  made 
is  the  standard  for  that  agreement.  If  the  thing  sold  is  not 
the  thing  in  which  return  is  to  be  rendered,  what  other 
standard  will  serve  better?  The  creditor  rarely  knows 
months  or  years  ahead  what  particular  goods  he  will  turn 
out  to  need,  or  the  debtor  what  particular  goods  he  will 
have  with  which  to  make  payment.  Thus  that  commodity 
is  best  selected  as  standard  into  which  the  debtor  can  always 
and  easily  convert  his  resources  and  which,  in  turn,  the  credi- 
tor can  most  easily  exchange  for  what  he  turns  out  to  need. 
That  commodity  is  money.  The  same  conveniences  impose 
its  selection  as  standard  of  deferred  payments  that  dictate 
its  use  in  current  exchanges.  In  either  use  it  is  both  inter- 
mediate and  standard ;  the  two  functions  are,  in  fact,  not 
two,  but  one. 

The  function  of  the  standard.  —  We  may,  then,  take  it 
as  established  that  some  one  thing,  or  possibly  some  one 


THE  DISCHARGE  OF  DEBTS  239 

specific  group  of  things,  must  be  selected  as  standard  in 
any  relation  of  deferred  payment.  But  precisely  what 
is  the  function  of  this  standard?  If  it  work  justice  between 
debtor  and  creditor,  it  must  do  this  by  bringing  about  some 
sort  of  equality  between  the  loan  and  its  payment.  This 
equality  cannot,  therefore,  be  an  equality  in  value :  for  what 
precisely  would  equality  in  value  mean? 

Equality  in  price  we  already  know.  The  actual  contract 
calls  for  this  and  nothing  more.  This  sort  of  equality,  then, 
requires  no  definition,  however  greatly  it  may  stand  in  need 
of  essential  explanation.  That  two  things  are  equal  in 
price  means  merely  that  they  exchange  for  the  same  sum  of 
money. 

Value  is  not  quantitative.  —  But  is  this  the  same  thing  as 
saying  that  they  are  equal  in  value  ?  And  in  what  sense  is  it 
the  same  thing?  Obviously,  since  price  is  an  exchange  rela- 
tion, it  must  thereby  be  also  a  value  relation ;  two  things 
may  have  the  same  price  value  —  may  be  equal  in  their 
command  of  money.  But  is  nothing  more  than  this  implied 
in  an  equality  of  value?  If  a  horse  exchanges  for  a  cow, 
there  is  here  in  the  very  terms  of  the  case  an  equality ;  the 
horse  buys  the  cow  or  the  cow  the  horse.  But  does  this 
equality  in  value  imply  more  than  the  mere  fact  of  exchange, 
that  one  thing  buys  the  other  ?  Is  it  also  asserted  or  implied 
that  the  value  of  the  cow  is  one  quantity  or  sum  of  value, 
and  that  this  quantity  or  sum  is  equal  to  the  quantity  or 
sum  of  value  which  is  in  the  horse  —  that  horse  and  cow 
have  each  a  value  of  its  own,  characteristic  of  it,  intrinsic  in 
it,  attaching  to  it,  possessed  by  it  —  a  quality  or  attribute, 
a  quantitative  something,  precisely  as  great  as  the  same 
sort  of  quantitative  something  belonging  to  the  other  — 
this  quantitative  equality  of  the  two  thus  underlying  and 
explaining  the  fact  that  they  exchange  one  against  the 
other? 

The  fact  is  that  value  is  not  a  quantity.  That  the  value  of 
any  one  horse  is  any  one  cow  means  nothing  and  is  nothing 
more  than  the  assertion  of  this  fact  that  the  one  particular 
horse  buys  the  one  particular  cow.  That  two  things  exchange 
against  each  other  imports  no  common  quality  in  which 


240  THE  ECONOMICS  OF  ENTERPRISE 

each  equally  and  quantitatively  shares,  whether  utility  or 
cost  or  value  —  unless  indeed  it  be  merely  this  quality  of 
exchangeability  implied  and  manifested  in  the  sheer  fact  of 
exchange.  Take  it  that  this  one  horse  buys  this  one  cow. 
How  much  quantitatively  as  an  independent  thing  is  the 
value  of  the  horse?  If  it  be  precisely  as  much  as  the  value 
of  the  cow,  how  much  then  quantitatively  and  independently 
is  the  value  of  the  cow?  As  much  as  that  of  the  horse? 
And  if  it  be  found  that  the  horse  will  also  buy  a  piano,  or 
this  or  that  or  other  third  thing,  does  this  in  any  way  help? 
What,  in  turn,  is  the  value  of  the  piano?  There  is  no  goal 
in  this  "  infinite  regress,"  but  only  a  recurrent  return  to  the 
original  point  in  the  circle. 

Value  is  actual  only  as  price.  —  We  have  already  seen 
that  market  value  occurs  in  the  price  regime  only  in  the 
one  particular  manifestation  of  price,  and  that  value  in  any 
other  sense  can  record  not  actual  exchanges  of  goods  against 
goods  —  exchanges  by  barter  —  but  only  deductions  or 
computations  made  possible  through  actual  price  exchanges 
—  mere  derivations  and  inferences  as  to  what  value  exchanges 
might  take  place  if  only  they  should  take  place,  or  as  to  what 
value  relations  may  become  actual  through  actual  exchanges 
in  price.  And  earlier  chapters  have  made  clear  also  that 
market  prices  are  not  proportionate  either  to  the  labor  or 
the  pains  or  the  feeling  sacrifices  of  production  on  the  one 
side,  or  to  the  service  or  utility  or  gratification  in  consump- 
tion on  the  other  side,  but  are  merely  the  equating  point  be- 
tween the  different  reservation  prices,  based  on  costs  in  money 
terms,  on  the  supply  side,  and  the  paying  dispositions  of 
consumers,  as  expressed  in  money  terms,  on  the  demand  side. 
Costs  cannot  be  reduced  to  any  common  denominator  of 
pain,  or  price  offers  to  any  common  denominator  of  utility. 
Nor  do  costs  sum  up  or  report  the  amount  of  labor,  or  even 
the  amount  of  wages,  incorporated  in  the  product,  but  only 
the  sum  of  marginal  sacrifices  reduced  to  the  common  de- 
nominator of  price.  And  similarly  on  the  demand  side  of 
the  price  equation :  the  fact  that  one  will  psLy,  at  the  maxi- 
mum, say  a  dollar  for  a  thing  —  in  other  words  is  marginal 
at  this  price  offer  —  means  only  that  at  any  higher  price 


THE  DISCHARGE  OF  DEBTS  241 

he  would  prefer  to  use  his  purchasing  power  for  something 
else.  A  marginal  pri(!e  offer  implies  merely  an  equality  of 
advantage  between  two  competing  lines  of  expenditure,  with- 
out suggestion  as  to  the  absolute  advantages  of  either. 
Equality  in  market  price  indicates  solely  that  different  things 
buy  equal  sums  of  money,  and  can  indicate  nothing  more, 
unless  it  be  that  their  cost  prices  may  have  been  equal  or 
the  paying  dispositions  equal,  as  affording  a  possible  ex- 
planation that  the  prices  are  equal. 

So  much  as  this  being  accepted,  what  can  equality  in 
value  indicate  other  than  mere  equality  in  price?  The 
market  knows,  it  is  clear,  no  other  value  equality  than  this, 
and  can  imply  no  underlying  qualities  that  equal  prices  do 
not  also  imply. 

Equality  in  value  an  empty  phrase.  —  The  truth  is  that,  for 
all  purposes  of  economic  analysis,  not  only  is  equality  in 
value  over  intervals  either  of  space  or  of  time  an  inaccurate 
or  a  meaningless  and  useless  concept,  but  also  that,  even 
in  current  exchanges,  it  is  an  almost  meaningless,  and  an 
entirely  useless,  concept.  For,  to  mean  anything  in  any 
one  of  these  relations,  this  value  equality  must  be  assumed 
to  be  a  quantitative  equality,  and  must  be  worked  out 
through  a  reference  to  something  chosen  as  a  standard  and 
therefore  also  taken  in  turn  to  be  itself  quantitative. 

Quantitative  notion  criticized  :  spacial  relations.  —  What, 
for  example,  would  it  mean  to  assert  that  a  horse  in  America 
has  less  value  than  a  horse  in  China  ?  It  may  possibly  mean 
that  a  horse  is  less  useful  here  —  perhaps  would  earn  less 
income  in  silver  or  gold,  or  would  afford  less  pleasure  —  in 
one  case  a  money  standard,  in  the  other  a  vague  utility  stand- 
ard, but  in  neither  case  a  value  standard.  Commonly, 
however,  the  assertion  would  mean  that  the  horse  would 
exchange  there  for  more  money  —  would  command  a  higher 
price  —  gold  or  silver  being  in  this  case  the  accepted  stand- 
ard. Or  a  higher  level  of  command  over  things  in  general 
may  be  the  fact  in  mind.  But  how  should  one  ascertain 
this  higher  level  of  command,  excepting  as  a  deduction  from 
the  prices  not  only  of  the  horse,  but  of  everything  else  in- 
volved in  the  comparison  ?     And  if  general  purchasing  power 


242  THE  ECONOMICS  OF  ENTERPRISE 

be  the  thing  intended,  this  is  not  a  value  test,  but  a  utiHty 
test.  The  reference  cannot  hv  to  things  in  general  in  point  of 
wcnght  or  surface  or  length  or  volume,  but  only  to  things 
in  general  in  their  aspect  of  serviceability. 

Time  relations.  —  The  same  impossibility  presents  itself  of  assert- 
ing equality  of  value  over  intervals  of  time.  To  say  that  a  horse 
is  worth  more  now  than  ten  years  ago,  is  to  say  that  it  has  more 
utility,  or  that  it  bears  a  higher  money  price  —  will,  that  is  to  say, 
command  a  larger  total  and  average  of  things  in  general,  or  will 
command  more  of  the  one  thing,  money.  In  neither  case  is  it  a 
value  fact,  otherwise  than  in  the  sense  that  the  command  of  the 
standard  is  itself  one  instance  of  value.  But  it  still  remains  true 
that  the  quantum  of  standard  signifies  merely  through  its  bearing 
on  the  quantum  of  things  in  general.  And  even  to  say  that  the 
horse  will  purchase  more  of  each  and  every  other  thing,  were  this 
really  in  mind,  would  be  to  assert  not  a  higher  value,  but  an  indefi- 
nite number  of  higher  values. 

In  same  place  and  time.  —  And  the  same  difficulty  is  really  pres- 
ent in  the  assertion  that  any  one  thing  to-day  has  the  same  value 
as  another  thing  to-day,  unless  it  be  true  that  nothing  more  is  in- 
tended than  that  one  thing  buys  the  other,  or  that  each  will  buy  the 
same  amount  of  some  other  one  tiling,  or  of  every  other  thing,  that  the 
other  buys  —  in  the  second  case  an  equality  in  terms  of  a  standard, 
in  the  third  case  a  general  equality  in  purchasing  power ;  and  in  this 
last  case,  all  things  together  are,  under  the  utility  denominator, 
somehow  lumped  in  to  constitute  a  standard  — ^_  unless,  indeed,  they 
are  left  unassembled  as  distinct  and  separate  value  relations.  But, 
even  as  assembled,  this  equahty  in  purchasing  power  with  reference 
to  everything  else  at  once,  can  be  inferred  from  only  one  fact,  and 
then  only  inaccurately  inferred,  namely,  from  the  fact  of  equal 
price.  It  is  only  against  money  that  all  things  do  in  fact  exchange. 
We  know  that  a  piano  of  a  given  grade  is  worth  1000  bushels  of  corn 
of  a  given  grade,  only  by  comparing  the  exchange  ratios  of  the 
respective  commodities  to  money.  It  would  be  difficult,  and  prob- 
ably impossible,  to  find  these  two  commodities  exchanging  against 
each  other. 

Money  has  no  one  value,  but  only  values.  —  The  sta- 
bility of  the  standard,  therefore,  cannot  be  a  stability  in  the 
sense  of  an  underl3dng  value  incorporated  in  money.  Value, 
as  we  have  seen,  is  always  an  exchange  ratio  bet\veen  specified 


THE  DISCHARGE  OF  DEBTS  243 

commodities.  A  given  thing  may,  tlieroforo,  have  one  price, 
but  not  one  value.  Gold,  as  the  money  commodity,  has 
no  price,  but  many  values.  Any  commodity  indeed,  whether 
gold  or  other,  and  whether  money  or  not  money,  must  have 
as  many  different  values  as  it  has  different  actual  or  potential 
exchange  relations. 

By  what  test  is  any  standard  capable  of  stability  or  fluctua- 
tion. —  Whatever  stability  is  attainable  in  the  relation  of 
deferred  payments  is,  therefore,  only  such  stability  as  may 
attach  to  the  standard,  whether  money  or  other,  that  is 
employed  in  the  case.  But  how  determine  whether  any  actual 
standard  is  stable?  Price,  equally  with  value,  is  not  adapted 
to  the  measure  function.  The  money,  say  gold,  returned  as 
payment  is  not  a  measure  of  anything ;  it  is  merely  the  agreed 
form  of  payment,  the  selected  standard.  The  difficulty  with 
either  price  or  value  for  the  purposes  of  a  measure  is  that 
each  is  lacking  in  the  quality  essential  to  measurement. 
The  impossibility  that  value  in  the  market  sense  be  measured, 
or  that  anything  of  value  can  serve  as  a  value  measure,  lies 
in  this  very  fact  that  it  is  the  very  essential  of  a  measure 
that  it  possess  in  itself  the  quality  it  is  to  measure  in  other 
things.  Only  something  of  length  can  measure  length ; 
only  something  of  weight  can  measure  weight.  And  the 
choice  of  a  measure  is  necessarily  arbitrary ;  to  express  any 
dimension  of  any  given  body  is  possible  only  in  terms  of 
relativity  and  only  by  reporting  it  as  such  a  part  or  such  a 
multiple  of  the  dimension  of  some  other  body.  So  many 
pounds  of  weight  is  merely  so  many  times  the  weight  of 
another  chosen  body,  taken  at  a  certain  purity,  under  pre- 
scribed conditions  of  temperature  and  of  altitude. 

Measurement  is  quantitative.  —  Both  market  value  and 
market  price  fail  in  the  requirement  fundamental  to  the 
notion  of  measurement,  namely,  that  a  measure  must  be 
quantitative  and  must  measure  things  of  quantity.  Neither 
value  nor  price  is  a  magnitude  or  a  quantity,  but  only  a 
ratio.  True,  a  ratio  can  be  restated  as  a  fraction  —  ^ 
or  1^  or  I  of  unity  —  but  it  becomes  quantitative  only  in 
becoming  concrete,  as  ^  or  ^  or  |  of  something.  Thus,  that 
the  exchange  ratio  between  hats  and  shoes  is,  say,  2  to  1, 


244  THE  ECONOMICS  OF  ENTERPRISE 

ofTers  no  possibility  of  giving  quantitative  expression  to  the 
exchange  ratio  of  hats  and  shoes  to  each  other  or  to  anything 
else.  Nor  does  the  selection  of  a  conventional  price  com- 
modity avoid  the  difficulty  in  any  other  sense  than  that  it 
makes  possible  of  comparison  the  ratio  of  horses  to  gold 
with  the  ratio  of  hats  to  gold  —  all  to  the  conclusion  that, 
while  horses  stand  to  dollars  as  100  to  1,  hats  stand  to  dollars 
as  1  to  1.  This  expresses  merely  the  two  different  exchange 
ratios  held  by  the  respective  commodities  to  gold  —  asserts, 
that  is,  two  different  powers  of  command  over  gold,  and 
then  declares  that  one  power  is  one  hundred  times  as  great 
as  the  other.  But  merely  as  diff-erent  ratios  to  gold  no  meas- 
ure is  disclosed :  (1)  The  value  of  gold  is  itself  possible  of 
expression  not  as  a  ratio  of  exchange  to  commodities  in  gen- 
eral —  for  there  is  no  such  exchange  possible  and  no  ratio 
for  its  expression  —  but  only  as  one  or  another  of  countless 
different  possible  ratios.  (2)  This  same  ratio  of  100  to  1 
between  horses  and  hats  is  equally  valid  to  express  the  rela- 
tive ratios  of  countless  other  pairs  of  commodities  to  gold, 
e.g.,  pianos  and  kitchen  tables,  houses  and  sewing  machines, 
shoes  and  laces.  The  ratios  of  things  to  one  another  in 
Brobdingnag  were  the  same  ratios  as  in  Lilliput.  The  real 
difficulty  is  again  that  all  these  various  ratios  to  gold  are 
mere  ratios  of  exchange,  and  are  comparable  simply  and 
only  in  this  reference,  and  are  entirely  lacking  in  any  ulti- 
mate basis  or  content.  In  this  respect  the  case  differs  from 
true  measure  ratios  of  weight  or  length.  With  weight 
the  reference  is  to  the  quantitative  objective  reality  of  pres- 
sure or  stress  —  with  length,  to  the  objective  quantitative 
fact  of  extension.  With  the  value  ratio,  however,  there  is 
nothing  but  the  ratio. 

The  meaning  of  stability.  —  What,  then,  can  be  meant  by 
a  stable  standard  of  deferred  payments,  it  being  admitted 
that  there  is  no  such  thing  possible  as  stability  in  value  f 
The  money  commodity  being  itself  the  standard  commodity, 
it  can  mean  nothing  to  speak  of  money  or  of  gold  as  stable  in 
price ;  and  it  has  been  shown  to  mean  even  less  to  speak  of  it 
as  stable  in  value.  In  what,  then,  consists  that  stability  which 
is  so  desired  ?    Why  is  it  so  desired  ?  and  how  does  it  matter  ? 


THE  DISCHARGE  OF  DEBTS  245 

It  must  again  be  recalled  that  the  problem  is  mainly  one 
of  achieving  justice  between  debtors  and  creditors.  Inas- 
much as  all  contracts  for  deferred  payment  must  run  in 
terms  of  a  standard,  and  inasmuch  as  it  is  practically  neces- 
sary that  all  of  these  contracts  run  in  terms  of  money  — 
gold,  as  the  standard  —  the  changing  exchange-relations  of 
money  to  the  countless  other  things  which  it  is  used  to  pur- 
chase become  of  great  importance. 

The  effect  of  changes  in  the  values  of  money.  —  As  an 
intermediate  in  exchange,  money  expresses  general  purchas- 
ing power.  But  if  the  receipt  of  it  always  followed  promptly 
upon  the  sale  or  service  for  which  it  was  received,  and  if 
the  expenditure  of  it  always  followed  promptly  upon  the 
receipt,  it  could  evidently  not  greatly  matter  what  the  gen- 
eral price  situation  might  be,  or  how  greatly  or  abruptly  this 
situation  might  change.  Changes  come  to  signify  only  as  they 
occur  between  the  time  of  the  receipt  of  the  money,  or  of 
the  right  of  receipt,  and  the  time  of  expenditure,  or  of  pay- 
ment. A  money  must  be  a  defective  money  if,  getting  it 
to-day,  one  cannot  tell  what  it  will  purchase  to-morrow ;  or 
if,  selling  goods  to-day,  one  cannot  tell  with  reasonable 
assurance  what  the  money  will  buy  when  it  shall  be  paid  a 
month  later ;  or  if,  loaning  money  to-day,  one  be  uncertain 
what  it  will  buy  at  the  expiration  of  the  term  of  the  loan. 
This  would  be  to  make  the  medium  of  exchange  itself  a  spec- 
ulative thing. 

But  why  should  it  not  be  speculative  ?  —  If  one  has  bor- 
rowed an  ounce  of  gold  or  a  pound  of  gold,  may  he  not  justly 
return  an  equal  weight  in  payment,  just  as  if  he  had  borrowed 
a  ton  of  iron  or  a  barrel  of  flour?  There  is  risk  of  change 
in  all  other  commodities ;  why  should  it  be  an  evil  that  there 
be  also  risk  with  the  medium  of  exchange  when  used  as  stand- 
ard? Each  party  to  the  contract  for  gold  accepts  this  risk 
of  change  —  a  risk  against  which  no  agreement  to  return 
any  specific  thing  in  the  future  can  be  entirely  free.  So  — 
it  may  be  argued  —  no  one  is  wronged ;  both  parties  to 
the  contract  know  its  risks;  it  is  a  fair  agreement,  only  it 
is  in  some  measure  speculative.  If  one  has  borrowed  a 
pound  of  gold,  let  him  return  a  pound. 


246  THE  ECONOMICS  OF  ENTERPRISE 

But  tlio  special  fitness  of  the  standard  commodity  for  its 
use  as  standard  rests  in  this  very  fact  that  it  is  a  commodity 
relatively  and  especially  free  from  this  menace  of  change. 
A  standard  is  ideal  for  its  purpose  in  the  precise  degree  that 
it  approximates  stability.  It  is  defective  —  no  matter  how 
much  better  it  may  be  than  some;  alternative  commodity  — 
in  the  precise  degree  that  it  falls  short  of  stability.  Other- 
wise the  money  itself  would  introduce  into  business  new  and 
serious  elements  of  speculation.  The  standard  is  chosen 
with  this  very  purpose  of  avoiding  to  the  utmost  these  spec- 
ulative modifications  in  contractual  relations.  Possibly 
enough  there  will  never  be  found  an  ideal  money  —  probably 
there  will  not.  And  it  may  well  be  true  that  there  is  less  of 
speculation  in  gold  contracts  than  in  other  contracts.  But 
a  perfect  money  would  not  be  speculative  at  all.  If  the 
standard  of  payments  itself  fluctuates,  this  is  in  itself  an 
evil. 

Deferred  payment  merely  a  special  case  of  price  exchange.  —  The 

foregoing  considerations  will  gain  new  force  with  a  further  analysis 
of  the  relation  of  deferred  payment.  When  you  sell  for  cash,  you 
get  the  right  to  buy  commodities  or  services.  From  your  point  of 
view,  the  exchange  is  really  complete  when  you  have  used  your  cash 
in  making  purchases.  Likewise  —  while  not  so  clearly,  yet  ulti- 
mately as  truly — all  cases  of  notes  and  bonds  and  credits  in  general 
are  really  protracted  instances  of  the  same  sort  of  exchange.  The 
wholesaler  sells  his  groceries  at  three  months'  time.  Instead  of 
receiving  his  pay  immediately  in  commodities,  or  in  the  money  with 
which  to  buy  commodities,  the  payment  side  of  the  trade  is  post- 
poned for  three  months.  It  is  important,  then,  that  the  medium  of 
exchange  shall  be  stable  in  purchasing  power,  else  one  party  to  the 
trade  is  helped  and  the  other  hurt  by  the  mere  fact  of  the  delay. 
So  when  you  loan  money,  you  really  transfer  the  right  to  things  or 
services ;  when  you  are  repaid,  you  get  in  return  the  right  to  things 
or  services.  Thus  a  loan  is,  in  essence,  a  long-time  barter.  If  you 
have  sold  hats  and  lent  the  proceeds  of  the  sale  to  X,  it  amounts  to 
the  same  thing  as  seUing  to  X  the  hats  or  the  goods  which  the  sale 
price  of  the  hats  will  buy.  When  he  pays  you,  he  really  returns  to 
you  your  remuneration  for  the  hats.  If,  therefore,  his  pajTnent  to 
you  be  a  just  one,  the  money  in  which  he  pays  must  not  have  gained 
or  lost  in  its  control  over  the  means  of  satisfying  wants.    An  appre- 


THE  DISCHARGE  OF  DEBTS  247 

elating  money  is,  therefore,  an  injustice  to  the  debtor — a  depreciat- 
ing money  equally  an  injustice  to  the  creditor.  It  is  thus  evident 
that  it  is  only  the  existence  of  credit  relations  that  makes  the  stabil- 
ity of  the  standard  seriously  important. 

Test  of  stability  is  in  utility.  —  But  it  still  remains  to  seek 
out  the  test  according  to  which  the  standard  may  be  declared 
either  stable  or  unstable.  If  the  general  trend  of  prices  be 
taken  to  afford  the  test,  in  what  consists  the  ultimate  bear- 
ing of  prices  ? 

An  appeal  to  the  function  of  money  in  current  exchanges  will 
again  serve  to  clarify  the  analysis.  The  sale  of  a  hat  for  money, 
precisely  because  it  is  a  transaction  of  exchange,  reports  an  ex- 
change ratio  —  a  value  relation  —  between  the  hat  and  the  money. 
So,  the  payment  of  this  money  for  a  pair  of  shoes  reports  one  more 
exchange  ratio  between  money  and  shoes.  Two  value  relations,  two 
ratios  of  exchange  between  gold  and  goods,  have  been  established — all 
to  the  result  of  working  out  one  exchange  relation,  the  barter  relation, 
between  hats  and  shoes.  But  suppose  the  case  to  be  that  only  one 
exchange  has  occurred  and  only  one  exchange  ratio  has  been  estab- 
hshed  —  the  hats  having  exchanged  directly,  by  barter,  for  the 
shoes.  Here,  in  the  very  terms  of  the  problem,  is  a  simple  value 
exchange.  But  note  the  nature  of  the  terms  in  this  value  ratio: 
both  are  items  of  goods,  useful  things,  not  value  items.  Exchange 
does  not  transfer  values,  but  goods.  Ratios  of  exchange,  value 
ratios,  are  ratios  between  things  —  things  which  are  not,  for  the 
purposes  of  the  exchange,  either  price  or  value  items,  but  only  items 
of  goods.  The  step  from  hats  to  shoes  is  merely  a  step  from  one 
useful  thing  to  another;  but  it  is  divided  into  two  shorter  steps. 
Just  as  the  purpose  of  the  isolated  producer  is  utiUty,  the  satisfac- 
tion of  his  wants,  so  ultimately  the  meaning  of  product  to  the 
producer  for  the  market  is  the  utility  of  the  things  into  which  he 
will  exchange  it.  Likewise  his  cost  outlay  is  ultimately  a  magnitude 
of  utility  or  of  disutihty  rather  than  a  magnitude  of  value.  Value, 
an  exchange  ratio,  really  has  no  magnitude.  So,  again,  from  the 
point  of  view  of  the  consumer,  gain  in  utihty  is  the  sole  ultimate 
motive  of  trade.  What  one  pays  for  a  thing  more  than  he  would,  if 
necessary,  have  paid,  his  buyer's  or  seller's  surplus,  while  it  must 
first  appear  in  a  money  statement,  must  finally  resolve  itself  into 
goods  obtainable  through  money  —  into  utility,  not  into  price  or 
value.  Producers  at  the  margin,  like  traders  at  the  margin,  are 
such  by  the  fact  that  the  utihty  in  prospect  and  the  utility  sacri- 


248  THE  ECOXOMICS  OF  ENTERPRISE 

ficcd  arc  at  balance,  —  arc  at  a  ratio,  one  to  the  other,  of  equality,  — 
and  all  of  this  irrespective  of  how  greatly,  for  the  different  marginal 
traders  respectively,  the  absolute  magnitudes  of  the  balancing  serv- 
ices and  sacrifices  may  diverge  —  irrespective,  that  is  to  say,  of 
whether  the  marginal  case  present  a  ratio  of  5  to  5,  or  of  2  to  2, 
or  of  ^  to  ^,  —  provided  all  the  while,  of  course,  that  even  this 
much  of  comparabiUty  may  be  assumed  between  the  feeling  magni- 
tudes of  different  men. 

The  principle  of  payment  is  indemnity.  —  In  view,  then, 
of  the  fact  that  exchange  is  ultimately,  in  individual  motive, 
a  problem  of  comparison  between  alternatives  of  utility  — 
that  the  quid-pro-quo  on  cither  side  is,  in  last  analysis,  a  util- 
ity quantity,  that  consumption  has  to  do  not  with  value,  but 
with  utility,  that  market  values  are  mere  exchange  relations 
between  things  of  service,  and  that  price  relations  are  mere 
intermediate  steps  in  the  ultimate  barter  of  goods  —  the 
problem  of  a  just  and  adequate  payment  to  the  creditor,  or 
of  a  just  and  adequate  sacrifice  to  the  debtor,  resolves  itself 
into  a  problem  of  indemnity  on  the  one  side  and  of  sacri- 
fice on  the  other,  into  quantity  of  utility  rather  than  into 
terms  of  price  or  value.  A  standard  is  working  properly 
for  purposes  of  deferred  payments  accordingly  as  it  meets 
this  test  of  equality  of  utility  —  of  indemnity.  It  must 
return  the  same  total  of  general  purchasing  power  —  of 
command  over  the  general  range  of  commodities  in  the  pro- 
portions in  W'hich  they  commonly  enter  into  consumption. 
And  because  a  general  rule  of  payment  can  take  no  account 
of  the  infinitude  of  individual  differences  among  men  in 
the  construction  of  their  budgets  of  expenditure,  this  prin- 
ciple of  indemnity  can  apply  only  impersonally  and  in  a 
large  and  general  way  to  all  contracts  of  deferred  payments. 

The  ultimate  test.  —  The  general  system  of  prices,  there- 
fore, is  indeed  the  test,  or,  more  accurately,  presents  the 
facts  by  the  use  of  which  the  test  of  utility  can  be  applied. 
If  the  price  system  itself  afforded  directly  the  ultimate  test, 
all  commodities  —  pepper,  flour,  meat,  coal,  quinine  — 
w^ould  be  equally  important  in  the  case,  pound  for  pound, 
yard  for  yard,  or  bushel  for  bushel.  Inasmuch,  however, 
as  utility  is  the  test,  each  commodity  must  be  taken  in  the 


THE  DISCHARGE  OF  DEBTS  249 

due  proportion  presented  by  the  relative  consumption  of 
it  in  terms  of  price.  Thus,  we  arrive  at  the  acceptance  of 
the  multiple  standard  of  deferred  payments  as  the  ideal 
standard  —  a  standard  based,  not  upon  any  one  commodity, 
and  not  equally  upon  all  commodities  entering  into  general 
consumption,  but  upon  all  commodities  taken  in  proportion 
to  their  importance  in  the  average  individual  budget  of  ex- 
penditure. The  dollars  returned  in  discharge  of  a  money 
obligation  should  be  a  sum  of  dollars  equivalent  to  the  prin- 
cipal sum  in  respect  to  power  over  the  general  schedule  of 
commodities  —  "a  method  not  intended  to  avoid  the  use  of 
money  as  a  means  of  payment,  but  to  compute  for  purposes 
of  justice  the  amount  which,  returned,  would  constitute  fair 
payment.  It  may  be  doubted  whether  the  method  will 
ever  come  into  general  use  or  would  prove  entirely  practi- 
cable if  adopted;  but  the  principle  on  which  it  proceeds 
has  been  accepted  by  most  economists  as  indicating  an 
approximately  ideal  standard."  ^ 

Utility  test  relates  solely  to  consumption  goods.  —  A  detailed 
treatment  of  certain  aspects  of  the  problem  of  deferred  payments 
must  be  postponed  to  other  pages.  There  is  neither  space  nor 
need  here  for  inquiring  whether  the  test  of  utility  points  to  equality 
in  marginal  utihty  or  in  total  utihty,  or  for  investigating  the  bearing 
of  changes  in  the  standard  of  living  upon  the  ideally  just  payment. 
It  must  suffice  for  the  present  to  have  established  the  test  as  one  of 
utility.  One  other  difficulty  remains,  however,  for  present  discus- 
sion. The  argument  thus  far  has  implied  that  equality  of  payment 
has  reference  solely  to  consumption  goods,  and  that  upon  the  basis 
of  these  exclusively  is  the  tabular  —  or  multiple  —  standard  to  be 
constructed.  If,  however,  this  is  the  correct  view,  it  is  not  quite  ob- 
viously or  axiomatically  so.  Surely  the  purchasing  power  which  was 
loaned  was  the  command  of  farms  and  of  machinery  and  of  long- 
time consumption  goods,  like  houses,  and  furniture,  as  well  as  the 
command  of  commodities  of  immediate  service.  Equally  clear  is  it 
that  men  desire  income-earning  properties  as  well  as  present  goods. 
When  the  interest  rate  falls  by  one  half,  this  means  that  the  man 
who  desires  to  provide  for  liis  own  old  age,  or  to  provide  a  given  in- 
come for  those  dependent  upon  him,  must  save  twice  as  large  a 
principal  fund.     So,  if  one  decides  to  buy  a  farm  of  a  given  net  an- 

1  Davenport,  Outlines  of  Economic  Theory,  Macmillan,  1906, 
Sec.  163. 


250  THE  ECOXOMICS  OF  ENTERPRISE 

nual  rental,  this  will  require  from  him  twice  as  lar^e  a  purchase 
price.  If,  then,  the  only  use  of  ])urchasins  power  were  in  the 
acquirement  of  investment  ]iroperties,  a  fall  in  the  rate  of  interest 
might  seem  to  demand,  as  the  pajnnent  of  a  loan,  a  corres]:)onding 
increase  in  the  number  of  dollars  to  be  returned.  If  consumption 
goods  are  falling  in  price  and  investment  properties  are  rising,  both 
classes  of  goods  have  seemed  to  some  economists  to  require  considera- 
tion in  constructing  a  multiple  or  tabular  standard.  Both  classes 
of  goods  absorb  purchasing  power;  shall  not  the  return  of  equal 
purchasing  power  be  computed  in  view  of  both  classes  of  goods? 

But  it  is  to  be  said,  on  the  other  hand,  that  all  capital  investments 
and  all  capitalization  —  present  worth  —  of  long-time  consumption 
goods,  or  of  ground  rents,  or  of  annuities,  are  merely  rights  to  future 
consumption  reduced  to  a  total  of  present  worth.  All  represent 
postponed  consumption  which  is  ultimately  to  mature  into  a  some- 
time present  consumption.  Is  there  any  force  or  purpose  in  a 
standard  which  shall  impose  as  payment  upon  a  loan  the  return  of 
rights  to  future  consumption  goods  —  future  incomes  —  instead  of 
rights  to  immediate  incomes? 

Professor  Irving  Fisher  and  Harry  G.  Brown  have  cogently 
argued  that  investment  properties  must  be  included  in  the  tabular 
standard :  "  To  base  our  index  numbers  for  time  contracts  solely  on 
services  and  immediate  consumable  goods  would,  therefore,  be  illog- 
ical. Though  the  practical  difficulties  maj^  amount  to  little,  yet, 
in  theory  at  least,  thej^  are  important."  ^ 

But  are  they  important  even  theoretically?  In  view  of  the 
fact  that  the  future  incomes  commanded  by  the  investment  prop- 
erties are  merely  postponed  consumables  in  place  of  immediate 
consumables  —  mere  abstinences  from  present  consumption,  — 
and  in  \aew  of  the  further  fact  that  an  investment  made  at  market 
prices  is  merelj^  a  future  consumption  chosen  as  substitute  for  pres- 
ent consumption,  and  that  these  future  goods  are,  at  the  purchase 
prices  of  the  properties  controlUng  them,  merely  the  market  equiva- 
lent of  the  present  consumables  that  they  displace  —  does  it  at  all 
matter  whether  they  are  or  are  not  included?  To  pay  in  present 
consumables  is  to  pay  in  something  that  will,  if  it  is  so  desired,  buy 
these  future  consumables,  and  will  buy  them  upon  an  exchange 
basis  precisely  representative  of  their  relative  importance  at  the 
time  of  payment.  This  is  the  rate  of  exchange  which  the  market 
fixes  for  present  goods  against  future  goods. 

1  See  Irvnng  Fisher,  Purchasing  Power  of  Money,  Maemillan, 
1911,  pp.  213-217;  and  Harry  G.  Brown,  Quarterly  Journal  of 
Economics,  August,  1909. 


THE  DISCHARGE  OF  DEBTS  251 

Consider  Fisher's  argument :  "  If  the  rate  of  interest  should  fall, 
the  borrowers  will  be  benefited  [having  to  turn  over  less  of  farms, 
or  machinery,  or  annuities,  or  ground  rents]  and  the  lenders  injured. 
The  value  of  land  and  of  any  other  property  would  rise  in  comparison 
with  the  value  of  food  and  shelter,  and  so  on."  But  this  payment 
in  food,  shelter,  and  so  on,  when  exchanged  over  into  land,  houses, 
etc.,  will  buy  less  of  these,  precisely  because  the  land  and  houses 
representing  future  food  and  shelter  are  now  worth  less  in  terms 
of  present  food  and  shelter.  Abstinence  has  become  easy  and  is, 
therefore,  cheap.  Justice  to  the  creditor  does  not  require  that  he 
shall  be  paid  in  future  food  and  shelter  on  the  basis  of  the  earUer 
and  more  difficult  abstinence.  It  has  become  easier  to  make 
provision  by  saving  for  future  food  and  shelter.  When  the  saving 
has  become  easier,  he  should  not  have  the  earlier  and  more 
generous  reward  for  it. 

The  purpose  of  this  chapter  has  been  not  primarily  to  ex- 
amine or  solve  a  problem  in  the  theory  of  money,  but  rather  to 
lay  the  foundations  for  a  discussion  of  the  theory  of  interest  — 
to  show  that  the  contract  in  which  interest  manifests  itself 
is  a  contract  of  deferred  payments,  and  is  commonly  and  typi- 
cally, and  almost  necessarily,  a  contract  for  the  payment  of 
future  money ;  and  that  therefore  the  interest  problem  has 
to  do  with  the  charge  or  premium  or  rent  which  accrues  with 
time  upon  an  oiDligation  for  the  payment  of  money ;  that  in- 
terest, as  the  equating  point  of  demand  with  supply,  is  the 
agreed  differential  between  present  money  and  future 
money ;  that  there  is,  in  the  nature  of  the  case,  nothing  else 
that  it  can  practicably  be ;  that  to  conceive  of  interest  as*a 
premium  of  present  value  over  future  value,  or  of  the  interest 
problem  as  a  value  problem  of  any  sort,  not  merely  dissociates 
the  problem  from  the  actual  facts  of  business,  misrepresents 
it,  makes  it  difficult  or  even  insoluble,  but  also,  in  the  last 
analysis,  makes  nonsense  of  it ;  that  to  state  the  problem  as 
one  of  price  is  merely  to  repeat  the  evident  and  patent  fact ; 
that  to  associate  the  interest  problem  with  the  problem  of 
deferred  payments  does  little  more  for  the  interest  problem 
than  to  help  toward  getting  it  accurately  stated ;  that  the 
problems  are  fundamentally  distinct  —  deferred  payments  an 
examination  of  what  ought  to  be  as  matter  of  justice  —  in- 
terest an  analysis  of  the  causes  and  the  processes  of  what  is ; 
but  that  the  two  problems  are  alike  in  this  —  that  neither  has 
anything  to  do  with  value,  or  with  any  aspect  of  value,  but 


252  THE  ECONOMICS  OF  ENTERPRISE 

only  with  money  and  the  relations  between  present  money  and 
future  money. 

Interest,  then,  can,  in  its  very  nature,  manifest  itself  only 
in  the  relation  of  deferred  payment.  It  has  its  basis  in  the 
post  Ironed  discharge  of  the  very  obligation  that  the  deferred 
payment  discharges  ;  it  is  a  surplus  above  the  sum  returned  as 
deferred  payment,  antl  is  a  surplus  paid  precisely  because  the 
pajTnent  is  deferred  ;  it  is  a  contract  to  pay  money  for  money, 
and  the  rate  is  a  per  cent  per  dollar  per  period. 

Thus,  while  rent  pays  for  a  given  thing  which  is  later  to  be 
returned  in  the  form  of  the  specific  thing  that  was  lent,  and 
is  merely  the  hire  of  that  thing  without  reference  to  the  ratio 
between  the  price  of  the  thing  and  the  return  upon  it,  —  the 
interest  relation  does  not  involve  the  return  of  the  specific 
money  lent,  and  does  involve  the  reduction  of  the  hire  to  the 
dollar-time  unit.  With  this  modification,  interest  is  rightly 
to  be  defined  as  the  rent  of  money. 

The  next  chapter  will,  however,  investigate  not  the  interest 
problem,  but  the  various  problems  connected  with  the  theory 
of  money  and  credit  —  postponing  to  the  following  chapter  the 
discussion  of  loan  capital  and  its  relation  to  interest.  Since 
money  is  both  the  thing  loaned  and  the  thing  repaid,  the 
right  working  of  a  standard  of  deferred  payments,  and  the 
significance  of  the  loan  and  interest  contract,  must  depend 
upon  the  existing  exchange  relations  between  money  and 
goods,  the  changes  to  which  the  relations  are  subject,  and 
the  influences  by  which  these  relations  are  determined  and 
modified.  Thus  a  general  discussion  of  money  logically  suc- 
ceeds the  analysis  of  the  standard  problem  and  precedes  the 
detailed  study  of  the  problem  of  interest.  The  next  chapter 
will,  therefore,  examine :  (1)  the  ultimate  and  the  deriva- 
tive functions  or  aspects  of  money  and  currency,  leading 
(a)  to  the  definition  of  money  and  of  currency,  and  ih)  to 
the  qualities  essential  in  the  money  commodity  or  commodi- 
ties ;  (2)  the  fixation  of  the  exchange  relations  between 
currency  and  the  various  goods  between  which  it  serves  as 
intermediate,  leading  to  a  discussion  of  (a)  banking  and  the 
effects  of  banking  credit  and  of  other  credit  upon  the  ex- 
change values  of  gold  as  medium  and  of  its  substitutes,  (6)  the 
nature  of  crises  and  their  relation  to  the  exchange  ratios  of 
the  intermediates  in  trade  —  prices,  (c)  depressions  and  their 
relation  to  prices,  {d)  Gresham's  Law,  leading  to  the  effects 


THE  DISCHARGE  OF  DEBTS  253 

of  currency  inflation,  whether  by  bimetallism,  paper  money, 
or  extended  credit,  (e)  the  Quantity  Theory  of  money,  (/)  bi- 
metallism in  general. 

This  discussion  of  money  will  especially  emphasize  the  rela- 
tions of  banking  and  credit  to  the  volume  of  circulating 
medium,  and  thereby  to  the  volume  of  the  loan  fund  at  any 
given  time  —  as  preparatory  to  the  study  of  the  rates  of  hire 
paid  for  the  time  use  of  funds  —  interest. 


y 


CHAPTER  XVII 

MONEY,    CREDIT,    AND    BANKING 

Some  intermediate  conclusions.  —  It  has  alrcadj'^  been  made  clear 
that  division  of  labor  is  possible  in  a  competitive  society  only  in  the 
degree  that  exchanging  takes  place ;  that  exchanging  can  take  place 
on  practicable  terms  only  -^dth  the  use  of  a  medium  of  exchange ; 
that  stabiUty  in  the  medium  of  exchange  is  seriouslj^  important  only 
in  relations  of  deferred  pajTuent ;  that  relations  of  deferred  pajmient 
require  the  use  of  a  standard ;  that  it  is  practically  unavoidable  that 
this  standard  be  money ;  that  the  stability  of  monej^  for  the  purpose 
in  hand  has  reference  only  to  stability  in  the  command  of  tilings  of 
ser\aceabihty ;  and  that  contracts  for  deferred  pajiiients  and  con- 
tracts for  the  pajTnent  of  interest  have  both  to  do  ■w'ith  deferred 
payments  in  money. 

Some  deductions.  —  It  must  follow  that  whether  the  standard  is 
stable  or  is  fluctuating,  and  the  degree  of  the  fluctuation,  depends 
upon  the  degree  in  which  there  is  a  general  or  average  change  in 
prices.  To  say  that  the  price  of  any  conmiodity  is  faUing  is  to  say 
that  a  given  quantity  of  the  standard,  monej',  will  buy  more  of  that 
commodit5^  If  money  is  to  remain  constant  in  its  control  over 
goods  in  general,  there  must  be  no  important  change  in  prices  in  the 
large.  The  degree  of  this  change  is  the  measure  of  the  instability  of 
the  medium.  It  thus  comes  about  that  both  for  the  problem  of 
interest  and  for  the  problem  of  deferred  pajniients  we  are  concerned 
to  investigate  the  influences  that  bear  to  establish  the  price  situation 
in  general,  and  especially  the  influences  that  are  effective  to  modify 
any  system  of  prices  which  is  once  established. 

Currency  is  that  thing,  or  those  things,  specialized  to  the 
intermediate  function  in  exchange  and  generally  accepted 
in  that  function.  WTiatever  thing  has  come,  legally  or 
conventional!}^,  to  be  accepted  as  a  medium  of  exchange  is 
a  currency  thing.  But  it  is  currency  only  when  so  used. 
When  used  as  ornament  or  as  a  raw  material  in  industry, 
gold  is  not  money,   currency.     When,  for  example,  beads 

254 


MONEY,   CREDIT,  AND  BANKING  255 

and  ribbons  are  carried  by  traders  to  mid-Africa,  these  are 
intermediates  to  the  traders,  though  generally  mere  con- 
sumption goods  to  the  natives.  The  goods  received  by  the 
traders  are  some  of  them  wanted  by  the  traders  as  consump- 
tion goods ;  some  of  them  are  carried  home  for  sale.  The 
latter  are  currency  for  the  purposes  of  the  particular  case. 
The  function  of  money  is  essentially  and  fundamentally 
the  intermediate  function. 

The  different  uses  are  subdivisions  of  the  intermediate 
function.  —  In  last  analysis,  also,  all  the  different  uses  of 
money  or  currency  are  merely  different  aspects  or  emphases 
of  the  intermediate  function.  Deferred  payments,  as  we 
have  seen,  are  merely  deferred  payments  of  the  intermediate. 
So,  again,  of  the  standard  aspect ;  whatever  is  the  general 
intermediate  is  l^y  that  fact  the  standard.  The  functions 
are  not  two,  but  one  —  began  together,  and  have  grown  to- 
gether. That  two  things  exchange  one  against  the  other 
imports  and  implies  —  or  rather  is  —  an  exchange  equality 
of  each  to  the  other.  No  more  than  this  can  the  facts  ever 
report  —  mere  ratios  of  exchange.  Different  things  can, 
however,  be  compared  as  to  their  respective  exchange  ratios 
to  some  third  thing.  When  practically  all  exchanges  are 
made  through  an  intermediate,  all  exchange  ratios  come  to 
be  compared  in  terms  of  their  exchange  relations  to  that  in- 
termediate. Essentially  it  becomes  a  commodity  of  refer- 
ence. Exchanges  excepting  through  the  intermediate  rarely 
occur ;  and  values,  as  exchange  ratios,  are  actual  things. 
So,  to  declare  the  value  ratio  of  cloth  to  wheat,  copper  to 
tea,  meat  to  cotton,  is  merely  to  deduce  from  the  actual 
price  relations  what  these  non-monetary  exchange  relations 
would  be  if  only  they  actually  were ;  or  it  is  a  computation 
declaring  the  different  and  ultimate  barter  relations  which 
the  use  of  the  intermediate  permits. 

Doubtless  wheat  or  cattle  or  cloth  might  be  used  as  the 
unit  of  reference  or  computation  and  in  this  sense  be  a  stand- 
ard, even  though  never  employed  as  intermediate.  But  of 
how  many  yards  of  cloth  is  any  given  good  the  equivalent? 
If  neither  actually  exchanges  against  the  other,  it  will  be 
necessary  to  find  something  against  which,  directly  or  in- 


256  THE  ECONOMICS  OF  ENTERPRISE 

directly,  they  do  exchange.  Any  standard  which  docs  not 
report  actual  exchanges  reports  mere  deductions  made  from 
actual  exchanges ;  tlu^re  is  somewhere  an  actual  standard  or 
standards  on  which  as  mere  deduction  the  particular  standard 
rests. 

Clearly,  also,  the  intermediate  may  be  a  storehouse  of 
purchasing  power.  The  second  half  of  the  barter  may  be 
deferred.  The  intermediate  is  generalized  purchasing  power. 
Delay  is  one  of  the  privileges  which  especially  the  interme- 
diate function  carries  with  it. 

So  by  its  very  nature  the  intermediate  serves  as  payment 
in  whatever  transaction  it  is  used.  This  function  of  pay- 
ment —  liberation,  discharge,  acquittance  —  may  be  a  matter 
either  of  custom  or  agreement  or  of  legal  enactment.  But  in 
any  case  it  is  one  of  the  functions  of  intermediateship,  pre- 
cisely as  in  every  case  of  deferred  payment. 

Money  defined.  —  It  must  be  noted,  however,  that  the  interme- 
diate function  is  ordinarily  served  not  solely  by  minted  gold,  by  gold 
certificates  (government  receipts  for  gold  coin  deposited),  by  silver 
coin  and  silver  certificates,  by  govermnent  notes  payable  on  demand 
in  coin  (greenbacks) ,  by  bank  notes  pa3^able  by  the  issuing  bank  on 
demand  in  legal  tender,  viz.  in  gold,  gold  certificates,  silver,  silver 
certificates,  and  greenbacks —  but  also  by  checks,  drafts,  and  orders. 
All  these  different  media  the  economists  term  currency ;  but  not 
all  are  either  technically  or  popularly  called  money.  All  moneys 
are  intermediates,  but  not  all  intermediates  are  money.  In  truth, 
pretty  much  anything  may,  on  occasion,  function  as  intermediate 
for  any  clever  trader;  and  in  a  barter  economy  there  would  be, 
as  we  have  already  seen,  not  one  medium  of  exchange,  but  an  in- 
definite number  of  media.     Wliat,  then,  precisely,  is  money? 

Clearly  redeemability  is  not  the  test ;  nor  is  the  money  in  which, 
by  custom  or  by  legal  requirement,  all  the  others  are  finallj^  to  be 
redeemed,  the  sole  and  only  money ;  though  it  must  be  recognized 
that,  so  long  as  this  redemption  is  maintained,  the  ultimate  money  is 
the  ultimate  standard,  the  exchange  values  of  it  being  really  reflected 
and  represented  by  the  others.  But  greenbacks  were  money  in  the 
United  States  before  specie  resumption  became  actual  in  1879. 

Nor  is  the  promise  of  a  some-time  redemption  necessary  to  the 
money  function;  the  ultimate  money  might  itself  be  government 
paper  issues  without  either  prospect  or  promise  of  redemption  other 


MONEY,  CREDIT,  AND  BANKING  257 

than  that  required  by  the  legal  tender  privilege  or  the  tax-paying 
power.  On  some  terms,  clearly,  the  legal  tender  function  will  cir- 
culate a  purely  fiat  money  —  a  money  unsupported  by  any  promise 
and  resting  on  no  valuable  material  basis.  If  one  will  pay  a  lawyer's 
fee  to  be  defended  against  a  claim,  or  the  costs  of  an  insolvency  suit 
for  a  discharge  from  legal  obhgations,  surely  one  will  give  something 
for  paper  issues  controlling  this  power  of  legal  acquittance.  Poor 
money  they  may  easily  be,  but  money  of  some  sort  they  certainly 
are.  In  a  sense,  doubtless,  all  money  is  credit ;  the  receipt  of  it  as 
intermediate  implies  the  faith  that  the  receiver  can  pass  it  along, 
that  others  will  take  it,  that  it  will  retain  its  value  standing  till  he 
is  ready  to  offer  it  anew  as  purchasing  power.  He  accepts  it  as  a 
demand  against  the  market.  Saving  and  hoarding,  indeed,  espe- 
cially emphasize  this  credit  aspect  of  the  intermediate. 

Power  of  acquittance  is  the  test.  —  It  is  the  aspect  of  the  intermedi- 
ate commodity  as  payment,  as  means  of  acquittance,  of  contractual 
execution,  of  redemption  —  whether  established  by  legislative  gift 
of  legal  tender  power,  or  by  social  custom  and  convention  —  to 
which  we  shall  best  appeal  in  our  analj^sis  of  the  different  popular 
and  technical  variants  of  the  concept  of  money.  These  different 
meanings  refer  to  the  differing  degrees  in  which  the  different  media 
possess  this  potency  of  payment  —  to  the  breadth  of  the  field  over 
which  (a)  legally,  (6)  actually,  this  function  of  acquittance,  of  execu- 
tion, is  performed.  Put  in  another  way,  the  money  of  highest 
grade  is  that  money  which  has  least  intermixture  of  legal  or 
contractual  credit  —  that  money  which  does  not  rely  for  its 
current  acceptability  upon  any  claim  that  it  carries  with  it  of  pay- 
ment in  some  other  sort  of  money. 

"  Real  "money,  then,  standard  money,  the  money  of  ultimate  re- 
demption, is  that  money  —  gold  coin,  for  example  —  which  has  the 
power  of  fulfillment  and  discharge  of  any  and  every  credit  obligation. 
Even  a  contract  for  the  delivery  of  houses  or  lands,  or  for  perform- 
ance of  personal  service,  if  not  specifically  performed  according  to  its 
terms,  transforms  itself  through  court  procedure  into  an  obligation 
to  pay  money.  In  strict  common  law  theory,  it  may  indeed  be 
said  that  one  has  the  right  to  do  anything,  subject  to  the  necessity 
of  paying  legal  tender  for  it.  That,  then,  is  conventionally  money 
for  all  purposes  which  is  conventionally  able  to  serve  as  payment  for 
all  purposes  —  to  redeem  anything.  That  is  legally  money  for  aU 
purposes  which  has  a  parallel  legal  efficiency  —  gold  coin,  for  exam- 
ple. Irredeemable  paper  money,  also,  is  legally  this,  and,  as  many 
economists  beheve,  would  be  also  conventionally  this.  Interpreted, 
then,  from  the  point  of  view  of  this  principle,  moneys  range  from  the 
s 


258  THE  ECONOMICS  OF  ENTERPRISE 

partial  to  the  complete  money  function,  accordinjs;  to  the  degree  of 
their  etliciency  as  ]iayment.  In  wliat  range  or  relations  do  tliey 
{(i)  l(\L!:a.lly ,  {h)  actually,  serve  ?  What  obligations  do  they  discharge  ? 
Which  redeems  the  other?  And  which  all  the  others?  Tliat 
medium  which  both  legally  and  conventionally  is  weakest  in  power 
of  payment  —  private  credit  and  checks  against  bank  balances  —  is 
commonly  called  not  money  but  mere  currency.  Bank  notes,  as 
more  objective  and  impersonal  in  standing,  are  stronger  in  paying 
power  than  ordinary  credit ;  but  they  are  still  weak  in  the  sense 
that  legally  and,  upon  occasion,  actually,  thej^  are  subject  to  re- 
demption in  moneys  of  higher  rank  of  pajing  power.  Silver 
certificates  and  gold  certificates  are  one  grade  lower  in  rank 
than  the  coin  in  which  they  are  respectively  redeemed ;  the  re- 
lation of  warehousing  is  fundamentally  a  credit  relation.  Sil- 
ver coin  and  greenbacks  are  ultimately  redeemable  in  gold  coin. 
Gold  bullion  is  conventionally,  in  many  relations,  money  of  the  high- 
est rank.  Gold  coin  is  both  conventionally  and  legally  of  this 
grade  —  a  medium  of  acquittance  for  all  purposes.^ 

Money  is  a  relative  term.  —  It  appears,  then,  that  whether  a 
given  medium  is  money  for  the  purposes  of  any  particular  discussion 
must  depend  upon  its  relation  in  the  case  to  some  other  form  of 
medium.  Relatively  to  any  medium  or  to  any  obligation,  that  is 
money  which  carries  the  power  of  payment  or  of  redemption. 
Credit,  the  lowest  order  of  medium  within  the  currency  classifica- 
tion —  currency  meaning  unspecialized,  suspended  purchasing 
power  —  is  the  medium  of  the  weakest,  or  of  vanishing,  efficiency 
in  redemption.  It  is,  then,  mostly  an  arbitrary  matter  whether 
credit  be  called  money  for  any  purpose.  Popular  usage  has  not 
applied  the  term  to  it,  and  tecluiical  usage  has  presumably  done  well 
to  follow. 

One  currency  may  occasion  demand  for  other.  —  But  note  again 
that  it  is  in  the  very  nature  of  ultimate  money,  money  of  the  highest 
rank,  that  all  of  the  lower  grades  and  forms  of  circulating  media  are 
redeemable  in  it,  and  hold  a  parity  of  exchange  power  with  it,  so  far 
as  actual  redeemability  is  maintained.  In  some  degree,  therefore, 
and  upon  occasion,  these  lower  forms  of  media  furnish  a  demand  for 

1  Walker's  and  Fisher's  definitions  of  money  both  imply  these 
differences  of  degree : 

"  Any  commodity  generally  acceptable  in  exchange."  —  Fisher, 
Purchasing  Power  of  Money,  p.  2. 

"Money  is  the  medium  of  exchange.  Whatever  performs  this 
function,  does  this  work,  is  money." — Walkek,  Advanced  Course, 
Sec.  162. 


MONEY,  CREDIT,  AND  BANKING  259 

tlie  ultimate  money  and  to  this  extent  rank  lower  than  it  in  ex- 
change efficiency. 

The  important  qualities.  —  The  money  commodity,  or  the 
different  commodities  used  as  money,  must  have  great  purchasing 
power  in  small  bulk,  and  yet  not  so  great  a  power  as  to  be  over- 
minute  for  small  transactions.  The  necessary  adaptation  of  bulk 
to  the  magnitude  of  the  transaction  is  commonly  achieved  through 
the  use  of  different  commodities  side  by  side  as  money — gold,  silver, 
nickel,  copper,  paper.  Division  and  combination  of  the  ultimate 
money  must  be  possible  without  loss.  All  specimens  of  it  must  have 
the  same  quality,  must  be  durable,  must  not  seriously  deteriorate 
or  improve  with  time,  whether  by  decay,  chemical  change,  growth, 
or  reproduction.  The  total  currency  must  be  so  far  stable  in  supply, 
relatively  to  the  demand  for  it  as  an  intermediate,  as  not  greatly  to 
fluctuate  in  its  exchange  relations  with  other  commodities.  Iron 
would  be  too  bulky,  varies  greatly  in  quality,  and  is  subject  to  rust. 
Hay  is  too  bulky  and  is  variable  in  quality  and  quantity.  So  with 
wheat  and  tobacco.  Diamonds  are  over  scarce,  variable  in  quality, 
and  cannot  be  divided  or  combined  without  great  loss. 

Rate  of  current  increase.  —  Whether  the  standard  money  com- 
modity is  likely  to  be  the  more  or  the  less  stable  by  having  other 
than  money  uses  is  not  quite  obvious.  But  it  is  clearly  important 
that  the  annual  product  of  the  standard  commodity  be  so  small  in 
proportion  to  the  existing  supply  that  rapid  fluctuations  are  im- 
possible from  the  supply  side  of  the  case.  Wheat  or  tobacco  is 
mostly  consumed  in  the  year  of  its  production,  and  therefore  varies 
in  supply  with  the  year  and  the  time  of  the  year.  So  also  with  coal, 
and  measurably  so  with  iron.  But  gold  is  rarely  consumed  in  the 
sense  of  being  destroyed  and  is  commonly  not  so  intermixed  with 
other  products  or  with  labor  as  to  put  it  out  of  practicable  reach  for 
money  purposes.  In  some  cases,  doubtless,  e.g., with  gold  filagree 
work,  much  of  the  value  is  due  to  the  manufacturing  expense ;  but 
still  most  of  the  supply  of  gold  from  all  the  past  years  is  the  supply 
of  any  present  year  or  day.  Gold  is,  therefore,  relatively  stable 
on  the  supply  side.  An  amount  of  water  which  poured  into  a 
washtub  will  seriously  change  the  level  will  not  greatly  affect  the 
shore  line  of  a  lake. 

Credit,  Currency,  and  Banking. 

The  intermediate  employed  in  actual  transactions  is,  in 
increasing  degree,  that  form  of  currency  called  credit,  the 
lowest  order  of  currency,  rather  than  money  itself.     Checks 


260  THE  ECONOMICS  OF  ENTERPRISE 

ami  drafts  make  up  a  progressively  larger  shar(^  of  the  cireii- 
lating  metlium.  The  net  deposit  credits  in  the  national  banks 
in  the  United  States  —  to  say  nothing  of  the  other  banks  — 
are  double  the  volume  of  the  actual  money  in  the  country. 
And  a  large  share  of  this  actual  money  is  really  employed  as 
reserves  to  support  the  credit  circulation.  More  than  90  per 
cent  of  the  larger  sorts  of  transactions  are  mediated  through 
the  use  of  deposit  credit,  and  probably  more  than  one  half 
of  the  remaining  transactions  are  similarly  effected.  Thus 
the  study  of  banking  is  essential  to  any  understanding  of 
monetary  problems. 

The  method  and  extent  of  credit  issue.  —  Assume  that  a 
bank  with  a  cash  capital  of  $100,000  is  opening  for  business 
in  an  isolated  town  and  is  the  only  bank  in  that  town.  How 
much  can  it  lend  ?  Ordinarily  a  bank  lends  by  discounting  a 
customer's  note  and  by  giving  the  customer  a  deposit  credit 
upon  its  books  for  the  proceeds  of  the  note.  The  transaction 
amounts  to  the  exchange  of  the  banker's  promise  to  pay  on 
demand  against  the  customer's  promise  to  pay  at  the  end  of  a 
specific  short  term  —  say  from  one  to  six  months.  Accord- 
ing to  the  United  States  law  a  rural  bank  needs  keep  on  hand 
only  15  per  cent  of  its  deposit  liabilities.  If,  now,  our  bank  in 
question  lends  $100,000,  giving  deposit  credit  for  this  sum, 
it  has  $100,000  of  cash  on  hand  against  $100,000  of  cash  lia- 
bility.    Its  statement  will  stand  as  follows  : 

Resources 
Cash 
Notes 

$200,000  $200,000 

Now  let  it  lend  another  $100,000.  With  its  loans  and  de- 
posits each  standing  at  $200,000  its  reserves  are  50  per  cent 
of  its  demand  liability.  Only  with  $666,666  of  loans  will  its 
reserves  have  reached  the  15  per  cent  limit : 

Resources  Liabilities 

Cash  $100,000     Capital  Stock  $100,000 

Notes  (Loans  and  Dis-  Deposits  666,666 

counts)  666,666  $766,666 

$766,666 


Liabilities 

$100,000 

Capital  Stock 

$100,000 

100,000 

Deposits 

100,000 

MONEY,  CREDIT,  AND  BANKING  2G1 

Further :  Suppose  that  $100,000  of  cash  is  deposited  with 
the  bank  from  the  channels  of  business ;  how  much  more  can 
it  lend  ?  $15,000  must  be  retained  as  reserve  against  the  new 
liability;  $85,000  is  available  as  reserves  against  further 
lending.  Based  upon  these  further  reserves  loans  may  be 
granted  to  the  extent  of  nearly  $600,000  more.  In  fact, 
only  with  an  expansion  of  $1,233,333  in  loans  and  in  derived 
deposits  —  a  total  deposit  of  $1,333,333  —  has  its  reserve 
fallen  to  the  ratio  of  15  per  cent  of  its  liability. 

Resources  Liabilities 

Cash  (original)  $100,000  Capital  Stock  $100,000 

Loans  &  Discounts  666,666  Deposits  666,666 

^    ,    .        ,  1 85,000  -p,        •,    /        X  I  100,000 

Cash  (new)  |  jg^ooo  deposits  (new)  j  566!666 

L  &  D  (new)  566,666  $1,433,333 

$1,433,333 

The  situation  summarizes  as  follows :    On  its  asset  side 
the  bank  has  $200,000  of  cash  and  $1,233,333  of  securities 
(Bills  and  Notes).    Its  deposit  liabilities  amount  to$l,333,333. 
2 

Its  cash  is of  its  liability  —  15  per  cent. 

13.3+ 

The  function  of  reserves.  —  If  this  is  what  actual  banking 
means,  is  banking  sale?  What  would  happen  if  all  these 
deposits  were  immediately  called  for  in  cash?  True,  not  all 
are  likely  to  be  called  for,  but  some  cash  will  be  demanded. 
In  fact,  the  borrowers,  instead  of  accepting  all  of  the  proceeds 
of  these  notes  in  deposit  credit,  will  in  some  measure  require 
and  receive  cash.  Precisely  so  ;  and  so  the  bank  must  keep 
on  hand  a  cash  reserve  to  meet  this  possibility.  For  the  most 
part,  however,  the  customers  of  the  bank  make  payments 
through  checks  upon  the  bank,  and  these  credits  are  deposited 
in  turn  to  the  credit  of  other  customers.  No  cash,  but  only 
bookkeeping,  is  required.  And  if  some  customers  draw  out 
cash,  other  customers  will  probably  receive  it  and  return  it  to 
the  bank.  A  reserve  of  15  per  cent  is  enough  for  the  case. 
There  would,  indeed,  be  small  gain  in  banking  if  against  every 
deposit  an  equal  sum  in  cash  must  be  held  in  store  by  the 
bank. 


262  TflE  ECONOMICS  OF  ENTERPRISE 

Economy  of  redemption  money.  —  It  is  thus  evident  that 
the  oiniiloyment  of  S2()(),(K)0  casli  as  a  banking  reserve  has 
made  j^ossible  the  existence  of  a  more  than  sixfold  volume  of 
circulating  medium  —  currency.  Against  each  $1000  of 
deposit  liability  there  need  be  only  $150  of  actual  cash.  The 
bank  customer,  however,  thinks  of  his  deposit  claim  as  money, 
and  it  really  serves  him  all  the  purposes  of  money.  The 
right  to  have  the  money  when  desired  is  as  good  as  the  actual 
money,  is  more  convenient,  and  is  as  readily  and  as  service- 
ably  transferred. 

The  economy  of  money  through  the  use  of  credit  substi- 
tutes for  money  extends  really  further  than  the  foregoing 
analysis  indicates.  Under  the  law,  three  fifths  of  the  reserves 
of  a  rural  bank  may  be  on  deposit  with  banks  in  reserve  cities. 
Thus  against  $100,000  of  deposit  liability  the  rural  bank 
needs  hold  only  $6000  of  reserve  money.  Against  the  de- 
posit of  the  remaining  $9000,  the  reserve  bank  is  required  in 
turn  to  hold  a  reserve  of  only  25  per  cent  —  $2250.  And  of 
this  required  $2250,  one  half  may  be  represented  by  deposits 
in  central  reserve  cities,  e.g.,  New  York,  Chicago,  and  St. 
Louis.  Against  the  $1125  deposited  with  it  the  central  re- 
serve bank  is  required  to  hold  only  25  per  cent  of  reserves  — • 
$281.25.  Thus  at  the  outside  limit  of  credit  extension, 
$100,000  of  deposit  currency  may  be  supported  by  only 

$7406.25  of  reserves  in  money  ^6000  +  i('^^)  +  (^^ 
one  dollar  of  reserves  upholding  $13  of  currency. 

It  is,  of  course,  not  true  that  the  banks  ordinarily  allow  their 
reserves  to  run  as  low  as  the  legal  limit,  or  make  the  utmost  possible 
use  of  the  privilege  of  counting  claims  against  one  another  as  legal 
reserves.  Nor  is  it  accurately  true  that  all  forms  of  money  are  of 
equal  efficiency  in  the  support  of  credit.  Not  all  forms  of  money, 
but  only  those  of  the  higher  levels  in  the  money  scale,  are  allowed 
to  be  counted  as  legal  reserves.  We  have  already  noted  that  some 
forms  of  money  make  demands  upon  other  forms  for  redemption, 
or  are  limited  in  exchange  power  to  the  exchange  power  of  the  forms 
in  which  redemption  is  to  be  made.  The  total  exchange  efficiency 
of  the  money  of  a  country  is,  then,  not  accurately  to  be  computed  on 
the  assumption  that  all  moneys  are  equally  efficient  for  all  purposes 


MONEY,  CREDIT,  AND  BANKING  263 

—  that  some  are  not  in  varying  degree  burdens  upon  the  money 
functions  of  the  others. 

Banking  viewed  in  detail  and  in  the  aggregate.  —  And  one  further 
modification  is  called  for.  The  analysis  so  far  made,  while  valid 
for  any  isolated  bank,  or  for  the  banking  system  regarded  as  an 
aggregate,  is  not  precisely  accurate  for  the  affairs  of  any  one  com- 
peting bank  among  other  banks.  When  the  check  drawn  by  the 
borrowing  depositor  may  be  deposited  in  other  banks  and  collected 
by  them  against  the  lending  bank,  its  granting  of  credits  rapidly 
draws  down  its  reserves  to  swell  the  reserves  of  its  competitors. 
$100,000  of  new  reserves  may  not  mean  to  it  an  increase  of  lending 
power  of  more  than,  say,  $125,000.  For  banks  in  the  aggregate, 
however,  this  increase  of  reserves  brings  its  full  several-fold  in- 
crease of  lending  power,  provided  that  all  the  reserve  efficiency  is 
utilized  in  whatever  bank  it  rests.  As  the  lending  by  each  bank  is 
depleting  its  reserves,  the  lending  which  other  banks  are  doing  is 
reenforcing  these  reserves.  The  aggregate  possible  extension  of 
credit  is  not  changed. 

What  banks  actually  do  and  lend.  —  It  follows  from  the 
foregoing  analysis  that,  in  the  main,  banks  do  not  lend  their 
deposits,  but  rather,  by  their  own  extensions  of  credit,  create 
the  deposits ;  that  these  deposits  are  funds  which  the  de- 
posit-creditors of  the  bank  can  lend  if  they  will,  and  that 
many  men  into  whose  hands  these  deposits  fall  through 
transfer  are  certain  to  use  them  as  funds  to  be  lent.  In 
fact,  also,  even  when  the  deposits  in  the  bank  are  not  derived 
from  the  lending  activity  of  the  bank,  but  are  really  funds 
deposited  from  outside  sources,  these  funds  are  commonly 
used  by  the  bank  as  a  reserve  basis  on  which  loans  are  ex- 
tended rather  than  as  funds  which  are  themselves  loaned  out 
by  the  bank.  Banks  are,  in  truth,  mostly  intermediaries 
between  debtors  and  creditors  —  but  not  in  the  sense  of 
borrowing  funds  from  one  class  of  customers  in  order  to  lend 
them  to  another  class,  but  rather  in  the  sense  of  creating  for 
their  borrowing  customers  funds  which  may  be  used  by  these 
borrowers  as  present  purchasing  power.  The  borrower  be- 
comes indebted  to  the  bank  in  order  that  for  his  own  purposes 
he  may  use  the  promise  of  the  bank  as  the  equivalent  of 
cash  to  himself.  In  the  form  of  a  deposit  liability  the  bank 
becomes  a  debtor  to  whomever  the  borrower  shall  nominate. 


264  rilE  ECONOMICS  OF  ENTERPRISE 

The  fact  that,  the  borrower  pays  interest  while  the  bank  under- 
takes a  noninterest-bearing  ol)ligation,  or  pays  relatively  low 
interest,  ex]ilains  in  the  main  the  gains  attending  the  busi- 
ness of  commercial  banking. 

Deposits  and  solvency.  —  It  is,  therefore,  a  sheer  blunder  to 
infer  that  a  bank  is  rich  or  strong  because  of  its  great  total  of  de- 
posits, or  to  regard  deposits  in  banking  institutions  as  making  part  of 
the  aggregate  wealth  of  the  community.  Instead,  the  deposits 
indicate  for  a  bank  the  extent  of  its  operations,  and  indicate  for  a 
community  the  extent  to  which  the  banks,  under  the  guise  of  non- 
interest-bearing  obligations,  have  assumed  the  debts  of  business 
men,  on  temis  of  these  business  men  becoming  debtors  —  and  interest- 
paying  debtors  —  to  the  banks.  The  solvency  of  the  bank  is  in 
its  portfolio  of  securities.  Its  deposits  are  not  its  assets,  but 
its  liabilities.  These  liabilities  it  has  mostly  created  for  the 
use  of  its  borrowers.  The  further  it  may  safely  go  in  assuming 
liabihties,  the  larger  its  holdings  of  borrowers'  notes  may  be,  and 
the  more  interest  or  discount  charges  it  may  collect.  Essentially, 
therefore,  the  business  of  a  bank  is  a  form  of  suretyship  —  the 
guaranteeing  of  its  borrowers'  solvency  —  an  underwriting  of 
the  credit  of  its  customers.  The  bank  transfers  its  customers' 
prospective  future  paying  power  into  present  funds.  It  is  for 
this  reason  that  the  contract  takes  the  form  of  a  money  loan  and 
the  premium  the  guise  of  an  interest  payment. 

Bank  loans  related  to   currency  and  loan  funds.  —  And 

note  now  that  it  is  precisely  because  the  business  of  a  bank  is 
to  furnish  to  its  borrower  a  present  purchasing  power  for  his 
own  use  that  the  business  of  banking  becomes  the  source  of 
the  larger  part  of  the  circulating  medium  of  society.  In 
their  service  to  their  customers  the  banks  create  currency; 
and  in  creating  currency  they  create  loan  funds  v/hich,  in  the 
hands  of  the  holders  of  them,  are  available  like  other  cur- 
rency for  any  purpose,  either  lending  or  other. 

The  sources  of  currency  supply.  —  It  is,  then,  clear  that 
the  larger  part  of  the  circulating  medium  of  society  is  not 
money ;  that  not  all  of  the  money  that  there  is  is  bullion 
money ;  and  that  not  even  all  of  the  bullion  money  need  be 
ultimate  money  —  redemption  money  of  the  highest  rank. 
The  sources  of  currency  in  society  are  various  —  some  of  it 


MONEY,   CREDIT,  AND  BANKING  265 

bullion,  with  a  cost  of  production  limit  upon  its  supply,  somo 
of  it  government  paper,  substantially  free  of  cost,  some  of  it 
banking  credit  with  certain  peculiar  and  appropriate  costs 
attending  its  issue. 

Currency  and  its  cost  of  production.  —  It  is  obvious  that 
the  actual  limitations  upon  the  supply  of  exchange  media 
must  be  made  clear  if  we  are  to  understand  the  influences 
which  are  fundamental  to  the  exchange  values  of  the  currency 
unit.  Only,  indeed,  by  this  investigation  of  the  sources  of  the 
supply,  and  of  the  terms  on  which  each  different  factor  of  the 
supply  is  available,  are  we  in  position  to  understand  the  in- 
fluences which  impose  upon  bidders  for  money  a  certain  level 
of  sacrifice  in  obtaining  it. 

What,  then,  are  the  limitations  upon  the  supply  of  credit 
currency  supplied  by  the  banks?  In  other  words,  what  are 
the  banking  costs  in  the  granting  of  demand  deposit  rights  to 
customers?  Evidently  limitations  there  must  be,  and 
limitations  in  the  nature  of  costs,  else  the  competitive  activity 
of  the  banks  would  indefinitely  increase  the  supply  of  cur- 
rency, and  any  would-be  purchaser  of  goods  or  payor  of  debts 
or  projector  of  an  enterprise  could  have  the  time  use  of  pur- 
chasing power  gratis ;  no  limit  would  exist  to  the  rise  in 
prices  which  must  attend  this  increase  in  the  circulating 
medium. 

What  are  these  limitations?  (1)  Each  bank  must  con- 
form the  volume  of  its  lending,  and  therewith  its  issue  of 
circulating  credit,  to  the  fundamental  requirement  that  it  be 
always  able  to  make  good  its  agreement  to  discharge  its  de- 
posit liabilities  on  demand.  To  maintain  reserves  involves 
expense.  Especially  may  it  be  expensive  if  they  have  been 
allowed  to  get  low ;  securities  may  have  to  be  marketed 
at  a  sacrifice,  or  good  customers  pressed  for  payment  at  in- 
convenient times.  In  periods  of  general  pressure  or  panic, 
other  banks  are  not  likely  to  be  in  a  position  to  lend  their 
own  reserve  funds  or  to  consent  to  create  deposit  credit  in  aid 
of  still  other  suffering  banks.  Not  rarely  the  bank  of  England, 
in  the  attempt  to  attract  reserve  funds,  advances  bank  notes 
or  deposit  credit  to  importers  of  gold,  without  imposing  the 


266  THE  ECONOMICS  OF  ENTERPRISE 

customary  interest  charge  for  the  covering  of  the  delays  of 
tlie  mint.  In  at  least  one  case,  in  1890,  it  borrowed  reserves 
from  tlio  Bank  of  France.  In  1907  the  United  States  Treas- 
ury made  especially  large  money  deposits  with  the  national 
banks  of  New  York  to  help  eke  out  the  needed  reserves. 
Meantime  the  interior  banks  were  compelled  to  pay  to  ex- 
porting merchants  generous  premiums  for  exchange  l)ills  upon 
Europe,  through  which,  despite  the  high  interest  rates  ruling 
in  European  markets,  these  banks  were  able  to  import  107 
millions  of  gold  for  their  own  reserve  requirements.  In 
fact,  the  banking  business  involves  the  hazard  not  merely  that 
some  of  the  debtors  of  the  bank  may  become  insolvent,  but 
also  the  general  and  overhead  hazard  attaching  to  its  under- 
writing service  that  it  may  itself  in  time  of  stress  become 
unable  to  meet  its  obligations.  Its  liabilities  must  not  be 
allowed  to  get  seriously  out  of  ratio  to  its  cash  resources. 

The  protection  of  reserves.  —  In  point  of  fact  also  the 
efforts  of  the  various  different  banks  to  maintain  each  its  own 
reserve  place  a  limit  on  the  extent  to  which  any  one  bank  can 
extend  its  activity  in  the  expansion  of  loans  and  of  the  deriva- 
tive liabilities.  Just  as  a  relatively  liberal  granting  of  credit 
by  one  bank  must  tend  to  transfer  its  reserves  to  other  banks, 
so  a  relatively  great  extension  of  credit  in  one  center  or  in  one 
country  must  tend  to  transfer  the  reserves,  e.g.,  gold,  to  other 
centers  or  countries.  Even  were  it  true  that  a  local  credit 
expansion  has  no  effect  upon  local  prices  and  thereby  upon 
the  currents  of  trade,  some  transfers  of  reserves  would  still 
take  place,  and  would  impose  a  policy  of  restriction  in  credit 
accommodations.  But  we  shall  later  see  that  the  influence 
is  actually  exerted  by  both  methods. 

(2)  Another  cost  in  bank-made  currency.  —  The  loan 
rates  of  the  bank  must  also  provide  a  fund  to  cover  its  costs  of 
administration  —  salaries,  clerk  hire,  rents,  and  the  like. 
Where  transactions  run  in  large  units  the  ratio  of  expense  to 
the  volume  of  business  may  be  low.  This  is  in  part  the  ex- 
planation for  the  low  rates  of  discount  in  the  great  financial 
centers  compared  with  the  rates  outside.  Credit  currency 
has  its  cost  of  production  rate  as  truly  as  any  other  service 
upon  the  market. 


MONEY,  CREDIT,  AND  BANKING  267 

The  Demand  for  Exchange  Media. 

Each  man's  need  for  currency  expresses,  on  the  one  hand, 
the  advantage  which  he  finds  in  exchange  and,  on  the  other 
hand,  the  almost  prohibitive  difficulties  of  barter.  Every 
transaction  of  barter  promises  to  each  of  the  traders  a  net 
advantage  —  a  differential  between  the  utility  of  the  thing 
parted  with  and  of  the  thing  received.  The  use  of  an  inter- 
mediate of  exchange  divides  the  barter  transaction  into  two 
steps,  two  separate  transactions.  Grain  for  money  and  money 
for  shoes  sum  up  finally  into  grain  for  shoes.  The  advantages 
of  the  completed  barter  are  achieved  through  two  trades. 

Traders'  surpluses  in  price  exchanges.  —  It  is,  then, 
evident  that  the  total  advantage  attendant  upon  the  com- 
pleted barter  divides  itself  into  two  separate  advantages  at- 
tending upon  the  two  trades  that  are  involved  in  the  use  of  an 
intermediate.  Every  seller  of  wheat  for  money  achieves  a 
seller's  surplus ;  he  would,  if  necessary,  have  sold  for  less. 
When  he  finally  decides  to  invest  his  money  in  shoes,  he 
achieves  in  turn  a  buyer's  surplus ;  he  would,  if  necessary,  have 
paid  a  higher  price.  It  is  doubtless  true  that  money,  as 
money,  has  no  other  utility  than  that  of  an  intermediate. 
But  this  utility  as  intermediate  it  clearly  has.  Through  it 
and  dependent  upon  it  accrue  all  the  advantages  which  at- 
tend the  completed  barter. 

The  allocation  of  surpluses.  —  But  how  shall  this  advan- 
tage be  apportioned  between  the  two  steps  by  which  it  is 
attained  ?  Each  step  is  necessary.  Does  it  therefore  follow 
that  the  advantage  divides  equally?  The  reservation  price, 
the  minimum  selling  price  of  the  seller,  say  of  a  cow,  is  that 
amount  of  money  which  expended,  say  for  a  wagon,  will 
command  a  utility  equal  to  that  of  the  cow.  So  viewed  it 
would  appear  that  whatever  extra  money  is  realized  upon  the 
sale  of  the  cow  is  a  surplus  attached  to  this  sale.  But  this 
leaves  no  surplus  to  be  ascribed  to  the  further  transaction  of 
buying  the  wagon.  Yet  the  purchase  of  the  wagon  is  not 
necessarily  conditioned  on  selling  the  cow.  What  is  the 
minimum  price  at  which  the  wagon  would  be  purchased? 
Money  being  good  merely  for  the  purchasing  of  things,  the 


268  THE  ECONOMICS  OF  ENTERPRISE 

sacrifice  in  biiyiiic;  the  wap;on  —  once  tlie  money  is  in  hand  — 
is  eioarly  the  foregoing  of  some  alternative  commodity  that 
the  money  would  buy.  The  process  of  expending  the  money 
offers  therefore  its  separate  aspect  of  gain,  equally  with  the 
process  of  trading  for  it. 

Interrelation  of  surpluses.  —  The  difficulty  can  be  resolved  only 
by  an  accurate  appreciation  of  the  nature  of  trading  surpluses  in 
general.  In  point  of  fact  any  one  of  several  processes  necessary  to 
the  achieving  of  an  end  may  exhaust  all  of  the  advantages  which 
attach  to  that  end.  One  who  is  planning  to  expend  $5000  in  a  house 
would  pa}'',  say,  twice  as  much  for  any  essential  item  in  the  struc- 
ture as  he  actually  has  to  pay.  But  it  does  not  follow  that  in  the 
completed  house  there  is  a  surplus  of  $.5000  above  what  he  has  to 
pay  for  it  in  the  aggregate.  Each  of  these  separate  maximum  pay- 
ments is  conditioned  on  the  fact  that  the  other  maximum  payments 
are  not  actually  required.  Not  all  of  these  maxima  are  possible 
at  once.  So,  again,  if  there  is  a  $1000  advantage  in  prospect  out  of 
the  making  of  a  particular  journey,  one  might,  if  necessary,  pay  not 
far  from  $1000  to  overcome  any  one  special  impediment  to  it  —  to 
be  taken  on  time  to  the  station,  or  to  be  granted  an  exceptionally 
speedy  transport,  or  to  be  allowed  to  stop  at  a  station  not  upon  the 
train  schedule.  But  not  all  of  these  maxima  could  apply  at  once. 
So  what  one  will  at  the  outside  pay  for  food  or  shelter  or  clothing  is  a 
maximum  which  is  valid  solely  by  virtue  of  the  fact  that  other 
things  can  be  had  at  prices  far  below  the  maxmium  which  each 
taken  separately  might  command. 

The  truth  is  that  the  seller's  surplus  in  the  marketing  of  the  cow 
can  be  taken  to  be  the  entire  differential  between  the  cow  and  the 
wagon  only  upon  the  assumption  that  no  differential  is  computed  to 
attach  to  the  buying  of  the  wagon.  The  aggregate  of  advantage 
is  easily  arrived  at  for  the  two  trades.  But  since  both  are  essential 
to  the  advantage,  it  may  be  equally  well  attached  to  either  trade 
to  the  exclusion  of  the  other. 

Sellers'  surpluses  relatively  great.  —  In  point  of  fact,  however, 
one  docs  not  usually  know  precisely  what  he  is  going  to  do  with  the 
receipts  from  the  goods  that  he  sells,  but  only  that  he  is  going  to 
want  other  things.  In  view  of  these  prospective  and  indefinite 
wants  he  decides  what  lowest  price  to  accept  and  then  gets  all  more 
that  he  can.  Here  is  his  seller's  money  surplus.  When  later  he 
decides  what  he  shall  buy,  a  further  buyer's  surplus  appears  as 
a  balance  between  what  he  does  pay  and  what  he  would,  if  necessary, 


MONEY,  CREDIT,  AND  BANKING  269 

pay  —  the  advantage  which  one  purchase  offers  above  any  alter- 
native purchase. 

It  is  now  to  be  recognized  that  in  general  the  transaction  of  sale 
affords  the  larger  price  differential  —  which  is  only  another  way  of 
saying  that  sellers  are  corrunonly  more  anxious  to  sell  than  buyers 
are  to  buy.  Sellers  importune  buyers  rather  than  buyers  sellers, 
and  do  the  most  of  the  advertising.  "It  is  always  the  seller  who 
bribes,  never  the  buyer."  ^  It  is  easier  to  buy  at  a  bargain  than  to 
sell  at  a  bargain.  The  strategic  position  of  the  buyer  is  the  stronger. 
The  explanation  for  this  generally  recognized,  but  little  understood, 
truth  is  in  the  fact  that  the  seller  has  only  one  choice  —  that  to 
sell  or  to  retain  —  while  the  buyer  is  in  possession  of  a  commodity 
offering  a  wide  variety  of  applications.  The  producer  is  specialized 
to  his  particular  trade  and  practically  must  take  what  he  can  get  for 
his  products.  But  money  is  an  option  of  use,  and  is  an  especially 
desirable  form  of  wealth  precisely  because  it  possesses  this  special 
utility  of  option.  Thus,  while  the  differentials  between  different 
options  are  not  great,  the  differentials  between  the  good  for  sale 
and  the  good  commanding  the  option  are  relatively  marked. 

Inelastic  demand  for  media.  —  There  is,  then,  something 
peculiar  and  especially  imperative  in  the  demand  for  money. 
Upon  it  as  intermediate  depend  all  the  advantages  of  trade  — 
all  the  significance  to  the  individual  and  to  society  of  the 
assignment  of  tasks  to  special  ability  and  opportunity.  But 
the  chief  pressure  for  it  and  the  larger  advantages  attaching 
to  it  are  achieved  in  the  process  of  its  acquirement. 

The  General  Movement  of  Prices. 

The  exchange  relations  between  currency,  the  intermediate 
commodity,  and  the  other  commodities,  goods,  against  which 
it  exchanges  can  evidently  be  explained  only  by  explaining 
the  terms  on  which  possessors  of  goods  are  disposed  to  sacrifice 
them  in  order  to  obtain  money,  and  the  possessors  of  currency 
to  sacrifice  it  in  order  to  obtain  goods.  We  are  therefore  set  to 
examine  the  fixation  of  the  terms  of  actual  exchanges  and  to 
investigate  the  forces  which  determine  the  actual  making  of 
these  exchanges  in  all  their  difference  and  variety.  Why  is  so 
much  wheat  offered  by  the  sellers  against  so  much  currency,  and 

1  Industrial  Democracy,  Sidney  and  Alice  Webb,  Vol.  II,  p.  676. 


270  THE  ECONOMICS  OF  ENTERPRISE 

so  much  currency  offorod  by  the  buyers  against  so  much  wheat  ? 
And  why,  again,  shoes  for  currency,  clothes  for  currency, 
furniture  for  currency,  lands  for  currency?  And  we  are  all 
the  while  to  hold  firmly  in  mind  that  the  great  pressure  for 
exchanges  is  on  the  side  of  the  seller  of  the  goods  for  money 
rather  than  on  the  side  of  the  sellers  of  currency  for  goods, 
precisely  because  the  greater  part  of  the  advantages  of 
exchange  are  reaped  on  the  side  of  getting  the  money  rather 
than  on  the  side  of  expending  it. 

Values   of    gold   with  enlarging  use  as   medium.  —  In  a 

primitive  society,  lacking  any  conventional  medium  of  ex- 
change, or  in  any  society  in  the  very  beginnings  of  that 
specialization  of  employment  which  stamps  one  commodity 
out  of  many  as  especially  the  intermediate  commodity,  or  in  a 
society  in  which  gold,  for  example,  were  in  the  beginnings  of 
acquiring  the  monetary  emphasis,  the  exchange  relations  of 
gold  bullion  to  other  goods  would  report  the  fact  that  no 
possessor  of  gold  could  find  the  opportunity  of  any  further 
marketings  of  it  on  terms  of  getting  something  for  it  of  a 
marginal  utility  to  him  greater  than  the  marginal  utility  of 
his  gold  —  or,  to  put  the  same  fact  in  another  way,  that  no 
possessor  of  other  things  could  increase  his  offerings  of  these 
for  gold  on  terms  of  obtaining  a  larger  marginal  utility  through 
gold  than  the  marginal  utility  of  what  he  had  in  hand.  Any 
forces  modifying,  for  either  the  possessor  of  gold  or  the  pos- 
sessor of  other  goods,  these  relative  marginal  utilities  would 
disturb  the  exchange  relations  between  gold  and  other  goods. 
A  relatively  increasing  supply  of  gold  —  say  through  its 
relatively  falling  costs  —  would  lower  its  exchange  powers. 
So  any  influence  effective  to  increase  the  utility  of  gold  to  the 
individual  holders,  its  relative  utility,  would  tend  to  increase 
its  different  exchange  powers.  And  note  that  precisely  such 
a  force  to  increase  its  relative  marginal  utilities  is  the  fact 
that  it  is  coming  to  center  upon  itself  the  function  of  mediat- 
ing exchanges ;  forthwith  it  becomes  increasingly  advanta- 
geous to  the  possessors  of  other  goods  to  obtain  gold  for 
them  through  exchange. 

The  sole  fact  that  gold  were  entering  upon  the  intermediate 


MONEY,  CREDIT,  AND  BANKING  271 

function  would  tend  to  enhance  its  utility,  or,  more  accurately, 
would  itself  constitute  an  added  utility,  and  would  induce 
the  further  production  of  it  at  higher  levels  of  cost,  were  it  so 
obtainable.  Each  man  with  goods  to  be  marketed  would 
part  with  his  goods  on  such  new  terms  as  were  necessary  in 
order  to  get  possession  of  gold  —  the  medium  through  which 
he  could  get  those  things  for  which  the  gold  would  finally  be 
expended.  Recall  again  that  the  general  situation  of 
prices  reports  merely  the  quantities  of  other  things  respec- 
tively which  the  possessors  of  these  other  things  will  part 
with  in  order  to  get  gold. 

Relation  of  commodity  uses  to  use  as  medium.  —  It  is 
evident  also  that  the  utility  of  gold  for  other  than  intermedi- 
ate uses,  say  for  industry  or  ornament,  would  have  something 
to  say  for  the  exchange  relations  which  it  would  hold  when 
used  as  intermediate,  precisely  as  the  intermediate  use  would 
affect  the  marginal  utilities  of  gold  in  its  merely  commodity 
uses  relatively  to  other  things.  It  might  indeed  be  true  that 
the  supply  of  gold  were  so  limited  that  this  need  for  exchange 
purposes  should  so  far  raise  its  exchange  ratios  to  other 
goods  as  to  retire  all  the  demands  for  gold  for  noncurrency 
purposes — excepting  to  the  degree  that  the  demand  for  orna- 
ment and  ostentation  were  itself  stimulated  by  the  very  fact 
of  its  rising  exchange  ratios. 

Monetary  theory  distinctive.  —  Money  is  doubtless  a 
commodity ;  but  by  the  nature  of  its  monetary  function  it  is 
in  certain  very  important  respects  a  peculiar  commodity; 
there  is  in  the  demand  for  an  exchange  medium  something 
that  is  entirely  distinctive  of  this  demand.  In  one  sense, 
indeed,  (a)  there  is  no  limit  to  the  demand,  while  in  another 
sense  (h)  there  is  no  elasticity  in  the  demand. 

(a)  No  matter  what  the  volume  of  money,  gold  or  other, 
the  exchanging  will  be  mediated  by  this  volume.  Taking 
the  amount  of  exchanging  to  be  done  as  a  constant,  any  larger 
supply  of  media  will  be  absorbed  in  caring  for  this  constant 
volume  of  exchanges.  There  is  no  limit  to  the  increasing 
supply  that  may  be  employed.  The  adjustment  of  the  old 
demand  to  the  new  supply  implies  merely  that  the  exchange 


272  THE  ECONOMICS  OF  ENTERPRISE 

power  of  each  unit  of  the  medium  must  be  less.  There  is  in 
this  sense  an  unlimited  demand.  On  the  other  hand,  (6)  the 
exchanging  must  be  done,  no  matter  how  scant  is  the  medium. 
If  the  volume  of  need  does  not  change  and  the  supply  of 
media  is  smaller,  there  is  more  for  each  unit  to  do,  and  this 
more  must  be  done  at  no  matter  how  great  a  readjustment 
in  the  exchange  relations  between  money  and  goods.  In 
this  sense  the  demand  is  absolutel}^  inelastic.  The  aggregate 
purchasing  power  of  all  the  money  units  is  therefore  an 
unchanged  purchasing  power,  so  long  as  the  volume  of  ex- 
changing to  be  cared  for  is  an  unchanged  volume.  Neither 
the  aggregate  product  in  society  nor  the  amount  of  exchang- 
ing required  by  this  product  is  dependent  upon  the  volume 
of  exchange  media.  There  is  no  reason  why  any  buyer 
or  seller  should  forego  trading  because  of  the  general  price 
situation,  if  only  there  is  no  prospective  change  in  prices 
so  marked  and  so  sudden  as  to  disturb  his  decision.  The 
need  for  a  medium  of  exchange  in  a  competitive  society 
depends  (1)  upon  the  volume  of  products,  and  (2)  upon  the 
degree  of  specialization  of  production.  Money  is  the  com- 
modity through  which  as  intermediate  these  ultimate  barter 
relations  are,  in  the  absence  of  substitutes,  worked  out. 
Sellers  sell  goods  for  money  with  which  to  buy  goods.  So 
all  goods  to  be  exchanged  are  demands  for  monej^,  and  money 
is  in  turn  a  demand  for  goods.  The  demand  for  a  medium 
of  exchange  at  any  level  of  general  prices  is  therefore  variable 
in  the  sense  solely  that  the  volume  of  trading  changes.  In 
general,  this  volume  is  variable  only  (1)  by  changes  in  the 
aggregate  of  products,  or  (2)  by  changes  in  the  degree  of 
specialization  in  production.  Neither  of  these  changes  is 
monetary  in  origin. 

The  fact  that  the  demand  for  a  medium  of  exchange  is  practically 
inflexible  and  is  mostly  independent  of  influences  connected  with  the 
volume  of  media  finds  its  explanation,  as  we  have  seen,  in  the  trading 
surpluses  hid  in  every  transaction  of  barter.  The  money  received 
will  buy  for  the  seller  that  which  is  of  greater  utihtj^  to  him  than  the 
thing  parted  with.  Thus  all  the  inertia  and  all  the  momentum  of 
our  industrial  organization  are  expressed  in  the  demand  for  media. 
When  the  volume  of  exchange  media  is  insufficient  for  the  needs  of 


MONEY,  CREDIT,  AND  BANKING  273 

exchange  unless  on  terms  of  lower  prices,  these  buyers'  and  sellers' 
—  producers'  and  consumers'  —  surpluses  are  forces  adequate  to 
push  the  money  values  up ;  that  is,  prices  down.  If  the  supply  of 
media  is  large,  there  is  still  the  same  volume  of  exchanges,  neither 
greater  nor  less.  Thus,  the  extent  and  the  intensity  of  the  need  for  a 
medium  being  given,  prices  in  general  must  always  accommodate 
themselves  to  the  volume  of  exchanges  to  be  mediated ;  and  this 
process  of  accommodation  must  take  place  as  an  alteration  in  the 
value  relations  which  the  medium  assumes  to  the  different  commodi- 
ties exchanged  through  it.  These  conclusions  follow  necessarily 
from  the  practically  inflexible  and  inelastic  nature  of  the  need.  Only 
on  terms  of  suspended  exchanges  —  of  social  disorganization  and 
reorganization  —  is  the  demand  for  an  intermediate  to  be  retired. 
The  issue  is  whether  the  commercial  and  industrial  organization  of 
society  shall  adapt  itself  to  the  volume  of  media,  or  whether  by 
changes  in  prices  the  volume  of  media  shall  adapt  itself  to  the  de- 
mand. None  of  these  changes  in  price  is  adequate  to  retire  any  of 
the  demand  for  a  medium,  unless,  indeed,  the  changes  are  so  rapid 
and  so  marked  as,  taking  place  between  the  receipt  of  the  medimn 
and  its  outlay,  to  modify  in  appreciable  degree  the  traders'  sur- 
pluses. The  level  of  general  prices,  therefore,  is  unimportant  to  the 
trader.  If  what  he  sells  changes  in  price,  this  does  not  matter  so 
long  as  what  he  buys  correspondingly  changes.  The  real  and 
essential  relations  of  goods  to  goods  are  finally  in  no  wise  compli- 
cated by  the  situation  of  prices  in  general  or  by  the  volume  of  media. 
So  elastic  is  the  demand  for  media  that  indefinite  increases  in  its 
volume  may  be  absorbed  through  a  general  rise  of  prices.  So 
inelastic  —  in  the  other  sense  —  is  the  demand,  that  there  is  no 
upper  limit  to  the  values  of  money  —  the  fall  in  general  prices  — 
that  an  increase  in  exchanges  or  a  diminution  in  the  supply  of  media 
may  impose. 

Changes   in   media   and   changes   in   prices.  —  But   is   it 

true  that  a  changed  volume  of  media  must  affect  all  prices 
equally?  Other  things  being  equal,  such  must  be  the  case 
after  all  transitional  adjustments  have  been  completed. 
The  increase  in  the  supply  of  media  is  an  increase  which 
applies  equally  to  all  the  goods  that  are  to  be  exchanged 
through  it.  It  is  true  that  the  increase  may  not  in  the  first 
instance  present  itself  in  this  proportional  way.  If  the 
mining  camps  have  more  gold,  their  demand  will  first  ex- 
press itself  as  a  change  in  the  ratios  of  gold  offered  against  the 


274  THE  ECONOMICS  OF  ENTERPRISE 

goods  wliioli  mining  camps  consume.  The  Klondike  or 
Australia  will  in  turn  be  offering  more  favorable  money 
terms  for  the  things  that  are  imported.  These  waves  of 
influence  constantly  widen ;  the  process  of  leveling  up  will 
not  cease  till  it  is  complete.  Precisely  as  money  tends  to 
flow  away  from  the  centers  of  low  prices  and  into  the  centers 
of  higher  prices,  till  an  equality  of  prices  is  reached  —  barring 
the  special  influences  of  transjiortation  charges  and  restric- 
tions of  trade  —  so  more  purchasing  power  tends  to  be 
offered  for  goods  that  are  still  relatively  cheap  and  to  be 
diverted  from  the  commodities  that  are  relatively  dear. 

Prices  affect  prices.  —  It  follows,  therefore,  that  no  com- 
modity can  change  in  price  without  forthwith  initiating  the 
process  of  change  in  other  prices.  Whenever  it  is  true, 
and  so  far  as  it  is  true,  that  a  change  in  the  supply  of  media 
is  not  in  equal  degree  and  in  the  first  instance  a  change  in 
the  currency  demand  for  all  commodities,  it  comes  finally 
to  be  so.  It  was  shown  in  an  earlier  chapter  that  the  money 
demand  for  any  good  is  to  be  explained  only  upon  the  assump- 
tion of  an  established  situation  of  prices  for  other  goods ; 
whether  one  shall  pay  a  specific  sum  of  media  for  any  spe- 
cific thing  depends  upon  what  the  media  will  buy  of  other 
things.  Marginality  in  purchasing  is  the  point  of  indifference 
between  competing  applications  of  purchasing  power.  No 
one  can  decide  in  what  direction  to  apply  his  money,  his 
purchasing  power,  unless  as  the  expression  of  a  choice  between 
its  different  applications.  Nor  can  any  seller  decide  upon 
what  prices  he  must  have  for  his  goods  excepting  in  view 
of  what  he  can  buy  with  the  medium  that  he  is  to  get.  Un- 
avoidably, therefore,  prices  move  up  or  down  together  in 
response  to  a  change  in  the  supply  of  media. 

Paper  money  affects  prices.  —  The  analysis  thus  far  made 
has  necessarily  implied  that  the  issue  of  government  paper 
as  money  or  of  bank  funds  as  money  —  both  circulating 
side  by  side  with  gold  and  actually  interchangeable  with 
gold  as  the  ultimate  money  —  must  absorb  a  part  of  the 
demand  for  a  medium  of  exchange,  and  must  affect  prices 
exactly  as  would  an  equivalent  increase  in  the  supply  of 


MONEY,  CREDIT,  AND  BANKING  275 

gold,  excepting  (1)  tliat  by  the  resulting  lowering  of  the 
exchange  ratios  of  gold  the  gold  itself  would  be  somewhat  less 
rapidly  produced  at  the  mines,  and  (2)  that  the  new  issues  of 
paper  money  would  themselves  bear  in  turn  as  a  demand  upon 
gold  —  these  new  issues  requiring  in  some  degree  the  use  of 
gold  as  redemption  money  or  as  reserve  money. 

Supply  of  gold  affects  the  marginal  utilities  of  it.  —  Re- 
turning, however,  for  a  moment,  to  the  simple  conditions 
of  our  original  assumption,  that  of  the  sole  use  of  gold  as 
money  in  a  primitive  community :  As  the  gold  becomes  more 
plenty  —  as,  for  example,  through  larger  supplies  from  the 
mines  as  its  costs  of  production  are  diminishing — its  relative 
marginal  utilities  to  different  individuals  for  commodity 
purposes  are  falling;  thus  the  buyers  of  it,  the  sellers  of 
goods,  are  compelled  to  give  up  smaller  volumes  of  the 
various  goods  in  order  to  get  it. 

Applying  now  the  principle  to  the  actual  problem :  The 
cost  of  production  of  the  currency  commodity  —  so  far  as 
the  supply  is  conditioned  upon  cost  of  production  —  is 
related  to  currency  values  precisely  as  to  the  values  of  other 
goods  —  through  the  effect  upon  the  supply.  But  when 
the  total  supply  of  any  good  is  very  great  relatively  to  the 
output  of  any  year  —  which  is  necessarily  the  case  with 
money,  only  a  small  portion  of  the  continually  offering  prod- 
uct disappearing  through  consumption  —  cost  of  produc- 
tion must  work  slowly  and  tardily  as  an  influence  to  modify 
the  exchange  relations  of  that  good.  The  long-time  equi- 
librium of  prices  under  stable  conditions  is,  indeed,  in  large 
part  the  point  of  adjustment  between  the  cost  of  production 
of  gold  and  the  market  demand  for  it  either  for  money  or  for 
commodity  uses.  But  since  the  conditions  of  demand  are 
unstable,  both  on  the  side  of  the  products  seeking  exchange 
through  gold  and  on  the  side  of  the  quantity  of  other  media, 
the  point  of  stable  equilibrium  is  always  in  process  of  being 
approximated,  but  is  never  reached. 

Banks,    supply    of    media,  values    of    media.  —  But  now 

assume  that  banks  exist  and  that  through  them  the  oppor- 
tunity is  open  to  individuals  to  obtain  —  by  paying  the  banks 


270  THE  ECONOMICS  OF  ENTERPRISE 

for  the  issue  of  it  —  ereilit  currency  equally  serviceable 
with  gold  in  the  buying  of  goods.  Instead,  that  is,  of  giving 
up  goods  for  the  medium,  the  bank  customer  obtains  this 
mtxlium  upon  terms  of  making  jn-omises  to  the  bank  and 
of  paying  it  a  discount  —  or  interest  or  underwriting  — 
rate.  How  much  of  this  new  medium  will  be  provided? 
So  much  as  the  borrowers  will  pay  the  bank  for  issuing,  as 
equated  against  the  rising  terms  at  which  the  banks,  in  view 
of  the  increasing  cost  of  issue  to  them,  are  disposed  to  issue. 
Security  offered  :  rates  ofifered.  —  The  amount  of  currency 
which  the  bank  will  consent  to  furnish  to  the  borrowers 
will  in  part  depend  upon  the  security  which  the  different 
customers  can  offer,  and  in  part  also  upon  the  rates  which 
they  will  consent  to  pay.  The  customer  may  have  property 
which  he  can  offer  as  collateral,  by  pledge  or  by  mortgage 
—  property  which  he  could  sell  were  he  so  disposed,  but 
which,  rather  than  sell,  he  would  prefer  to  use  as  security. 
Or  he  may  be  able  to  pledge  to  the  bank  property  or  income 
which,  more  or  less  securely,  he  has  the  prospect  of  getting 
later.  Or  the  bank,  without  requiring  a  specific  pledge 
or  the  conditional  promise  of  some  surety  or  indorser,  may 
lend  upon  a  general  faith  in  the  customer's  paying  power 
later  to  accrue.  Many  men,  for  example,  borrow  upon  the 
prospect,  and  sometimes  upon  the  pledge,  of  later  salary 
receipts,  or  upon  the  expectation  of  a  harvest  to  be  reaped 
in  the  fall,  or  upon  the  goods  which  will  be  manufactured 
and  ready  for  the  market  when  the  promised  time  of  payment 
arrives,  or  upon  the  cattle  that  are  being  fed  for  beef.  A 
debt  secured  by  character  is  as  good  as  any  other,  if  only 
it  be  as  secure.  In  point  of  fact,  the  amount  of  funds  which 
a  borrower  can  secure  from  a  bank  is  commonly  not  limited 
to  the  net  property  or  wealth  of  the  borrower.  Borrowing 
is  always  essentially  a  promise  of  payment  out  of  future 
paying  power,  in  return  for  which  promise  the  banker  creates 
an  immediate  current  purchasing  power  in  terms  of  deposit 
credit.  The  net  resources  of  the  customer,  "  what  he  is 
worth,"  are  to  the  purpose  only  as  one  item  of  evidence  as 
to  what  he  will  in  the  future  be  able  to  do  —  only  as  one  of 
the  bases  on  which  future  control  of  purchasing  power  may 


MONEY,  CREDIT,  AND  BANKING  277 

be  relied  upon  from  him.  Most  commercial  loans  are  indeed 
loans  upon  the  expectation  that  the  borrower  will  have  future 
receipts  and  are  secured  finally  by  the  prospective  future 
marketable  product.  The  bank  holds  claims  against  the 
production  that  is  to  be.  Borrowing  to  obtain  present  pur- 
chasing power  is  much  more  largely  for  purposes  of  future 
production  than  of  present  consumption.  Thus  the  expected 
selling  price  not  only  motivates  the  borrowing  of  the  entre- 
preneur, but,  in  the  larger  part,  fixes  the  limit  to  which  the 
lender  is  disposed  to  go  in  the  extension  of  credit.  The 
borrower's  resources  are  a  guaranty  fund,  a  margin,  a  reserve, 
upon  his  operations.  The  activities  of  commercial  banking 
are  something  far  more  extensive  than  the  coining  of  present 
wealth  into  present  purchasing  power. 

Supply  of  credit  responds  to  rates  ofifered.  —  Thus  the 
intending  buyer  —  either  of  a  consumption  good  or  of  any- 
thing else  that  requires  funds  for  its  control  or  absorbs 
funds  in  its  hire  —  labor,  land,  raw  materials,  advertising  — 
finds  currency  at  his  disposal,  if  only  he  is  willing  and  able 
to  offer  against  the  present  funds,  the  currency,  either  present 
goods  for  immediate  sale  or  a  satisfactory  promise  to  return 
to  a  lender  future  goods  or  future  currency.  Through  the 
mechanism  of  lending,  therefore,  expected  future  goods  and 
future  incomes  function  in  varying  volume  as  present  cur-' 
rency.  At  any  given  time  the  volume  of  currency  offered 
by  any  particular  bidder  for  any  particular  good,  and  the 
exchange  relations  established  thereby  between  the  goods 
and  currency,  depend  in  part  upon  what  present  goods  the 
intending  purchaser  offers  for  currency  as  his  demand  for 
currency,  in  part  upon  what  currency  he  can  borrow  and 
the  terms  at  which  he  can  borrow,  through  pledging  his 
future  paying  power  to  the  bank  as  the  basis  on  which  it 
advances  to  him  a  present  paying  power. 

Bank  funds  affect  exchange  ratios  of  media.  —  Not  only, 
then,  does  the  activity  of  the  bank  place  its  customers  in 
the  position  to  offer  currency,  purchasing  power,  against 
goods,  but  this  purchasing  power  becomes  also,  in  the  hands 
of  any  earlier  or  later  holder  of  it,  a  part  of  the  currency 
in  general   circulation  —  brings   about  a  larger  volume  of 


278  THE  ECONOMICS  OF  ENTERPRISE 

intormodiates  of  cxchango,  and  as  it  moves  along  affects 
the  exi'luinge  relations  between  goods  and  money,  currency. 
Prices  in  gt^u^-al  are  nothing  but  the  summing  up  into  an 
average  of  all  these  different  prices  of  commodities  as  they 
are  separately  determined. 

It  is  not,  however,  true  that  these  separate  determinations 
are  arrived  at  independently  of  the  total  volume  of  media 
in  circulation  or  independently  of  one  another.  Prices 
move  together,  simply  because  purchasing  power,  as  an 
option  of  use  in  making  purchases,  can  be  used  for  buying 
one  particular  thing  only  as  the  outcome  of  a  choice  between 
what  it  will  buy  of  this  one  thing  compared  to  what  it  will 
buy  of  something  else.  Low  prices  on  the  alternative  goods 
direct  purchasing  from  the  particular  good  to  those  other 
goods ;  so  rising  prices  on  the  particular  good  tend  to  redis- 
tribute purchasing  power  toward  the  alternative  goods. 

Gresham's  Law :  International  trade. 

And  not  only  do  prices  in  any  one  country  move  together, 
but  prices  the  world  over  tend  to  move  together  —  allowance 
being  made  for  transportation  charges  and  for  restrictions  of 
trade,  e.g.,  by  tariff  laws.  If,  somehow,  the  prices  of  any  one 
good  in  one  country  come  to  be  higher  than  the  prices  in 
other  countries,  exports  of  this  good  are  restricted  and  imports 
stimulated.  Domestic  producers  prefer  to  sell  at  home; 
foreign  producers  tend  to  seek  this  better  market.  These 
effects  are  still  more  strongly  marked  where  the  domestic 
situation  is  one  which  has  tended  to  push  up  all  prices.  It 
is  evident  also  that,  merely  through  the  mechanism  of  prices, 
any  restriction  upon  the  importation  of  goods  from  abroad 
must  also  finally  restrict  exportation.  If  imports  are  pre- 
vented in  offset  of  exports,  money  must  make  good  the 
international  balance.  Prices  therefore  rise  in  the  country 
of  expanding  currency  supply,  and  fall  in  the  countries  from 
which  money  is  drawn.  Forthwith  there  sets  in  the  disposi- 
tion of  the  domestic  producer  to  sell  at  home  and  of  the  foreign 
customer  to  buy  elsewhere.  The  protectionist  needs  to  recog- 
nize that  to  prohibit  imports  is  ultimately  to  prohibit  exports. 


MONEY,  CREDIT,  AND  BANKING  279 

The  principle  of  what  is  known  as  Gresham's  Law,  "  Bad 
money  drives  out  good,"  is  essentially  similar. 

Any  commodity,  gold  or  other,  falls  in  its  exchange 
values  as  it  becomes  more  plenty,  whether  by  lower  cost 
of  production  or  by  other  influences.  More  must  sell 
cheaper  in  order  to  market  all.  Thus,  less  and  less  insistent 
demands  come  to  absorb  a  part  of  it ;  old  demands  reach 
larger  satisfaction  ;  new  demands  are  uncovered.  Likewise 
when  two  commodities  are  adapted  to  the  same  or  to  similar 
purposes,  a  change  in  the  supply  of  either,  or  in  the  demand 
for  either,  has  much  the  same  effect  upon  the  exchange  rela- 
tions of  the  other  as  would  follow  from  a  change  in  the  supply 
of  that  other  or  in  the  demand  for  it. 

Expansions  by  silver  or  paper  or  credit.  —  Thus,  coinage 
of  silver  to  be  circulated  side  by  side  with  gold  and  as  sub- 
stitute for  it,  or  the  issue  of  paper  money,  or  the  expansion 
of  credit  circulation  must,  as  an  increase  in  the  supply  of 
circulating  medium,  lower  the  exchange  values  of  the  money 
unit.  This  fall  in  the  exchange  powers  of  money,  this  rise 
in  prices,  this  weakening  in  the  money  hold  upon  the  money 
medium,  releases  in  some  measure  that  part  of  the  circulating 
medium  which  is  the  object  of  the  stronger  outside  demands. 
Essentially,  therefore,  expansion  by  cheaper  money,  or  by 
paper  or  credit  substitutes,  does  not  differ  from  expansion 
through  an  increased  supply  of  the  original  and  dearer  ma- 
terial —  excepting  that,  in  the  case  of  an  addition  of  money 
of  a  cheaper  material,  all  the  outflow  is  confined  to  the  dearer 
money,  the  cheaper  continuing  in  the  money  function  and 
tending  more  and  more  to  the  exclusive  performance  of  that 
function  as  the  dearer  money  flows  out. 

Any  rise  in  prices,  therefore,  whether  general  or  local, 
not  only  reduces  the  purchasing  powers  of  the  money  unit, 
but,  also,  with  the  outflow  of  the  one  metal  used  or  of 
the  dearer  of  the  different  metals  used,  lowers  equally  the 
values  of  that  metal  in  its  commodity  use  and  in  its  money 
use. 

Local  movements  of  prices.  —  Likewise  any  local  rise 
in  general  prices,  whether  clue  to  a  local  money  expansion, 
or  to  credit  extension,  or  to  any  other  cause,  stimulates, 


280  THE  ECONOMICS  OF  ENTERPRISE 

as  we  have  seen,  an  outtlow  of  the  money  metal  abroad ;  the 
bullion  tends  to  flow  to  the  most  favorable  market  for  it. 
Precisely  as  in  domestic  movements  any  inflation  or  expansion 
makes  a  better  market  for  some  forms  of  money  outside  of 
the  commodity  use  than  in  it,  so,  in  international  trade,  the 
local  expansion  makes  some  portions  of  the  currency  more 
desirable  for  buying  abroad  than  for  buying  at  home.  The 
currents  of  trade  are  disturbed. 

Danger  in  currency  experiments.  —  Bearing  these  facts  in  mind, 
tlie  futility  of  any  local  effort  toward  an  increased  currency  is  evi- 
dent. So,  also,  with  the  attempt  to  retain  a  market  for  goods 
abroad,  unless  on  terms  of  permitting  imports  of  foreign  goods. 
So,  again,  an}'-  national  excess  in  the  issue  of  paper  money  must 
mean  in  some  degree  the  loss  of  the  international  medium  from  the 
domestic  circulation.  Likewise  national  bimetallism  must  involve 
a  rise  in  domestic  prices,  a  progressive  exjiort  of  the  international 
medium,  a  currency  tending  constantly  to  contain  a  smaller  share  of 
international  medium  and  a  larger  share  of  the  substitute,  and,  al- 
most unavoidably  in  the  final  result,  monometalhsm  on  the  basis  of 
the  cheaper  metal.     (See  p.  321.) 

Commercial  Crises. 

Circulating  and  other  credit.  —  Not  all  credit  devices 
serve  as  economics  in  the  use  of  money.  Where  items  in 
open  account  offset  each  other,  the  economy  is  manifest. 
Where  credit  circulates,  the  economy  is  manifest.  But  the 
mere  granting  of  credit,  awaiting  a  later  settlement,  does 
not  lessen,  in  the  outcome,  the  demand  for  money,  but 
merely  postpones  it.  Credit  must  be  used  by  transfer  as 
pajTiient  or  as  quid-pro-quo  before  it  works  as  substitute  for 
money.  Nevertheless,  this  noncurrency  element  in  credit 
is  none  the  less  credit,  and  in  the  making  up  of  disaster  is 
as  important  as  any  other. 

Pre-panic  conditions.  —  The  period  preceding  a  financial 
crisis  is  commonly  a  period  of  seemingly  great  prosperity. 
There  is  a  popular  impression  that  such  prosperity  is  a  mere 
seeming,  and  that  panic  is  in  the  nature  of  a  necessary 
collapse.  It  would  be  going  too  far  to  claim  that  no  bubbles 
are  formed  in  the  course  of  business  expansion,  or  that  these 


MONEY,   CREDIT,  AND  BANKING  281 

bubbles  are  not  sources  of  financial  danger ;  but,  speaking 
generally,  the  popular  impression  is  a  mistaken  one.  The 
years  preceding  a  panic  constitute  a  period  of  great  indus- 
trial activity  and  of  great  productiveness.  Wage  earners 
have  been  well  employed  ;  transportation  and  merchandising 
have  been  in  smooth  and  successful  operation.  At  the  close 
of  the  period  it  will  be  found  that  the  wage-earning  classes 
have  rarely  been  as  Avell  housed,  as  well  clothed,  or  as  well 
fed.  They  are  exceptionally  well  supplied  with  the  smaller 
conveniences  and  comforts  of  life.  Measured  by  their  own 
standard,  the  laborers  are  prosperous  in  pleasant  homes 
and  large  personal  belongings.  In  the  aggregate,  they  repre- 
sent a  large  total  of  material  wealth.  The  farms  were  never 
under  better  cultivation,  the  herds  larger,  the  buildings 
more  substantial  or  in  better  repair,  the  homes  better  fur- 
nished. Likewise  of  the  manufacturer  and  the  merchant ; 
never  were  there  larger  stocks  or  more  warehouses  bursting 
with  merchandise.  Never  were  factories  daily  pouring  forth 
more  goods.  Turning  to  general  conditions,  it  will  be  found 
that  these  prosperous  years  have  rebuilt  cities  in  brick, 
interlaced  states  and  even  continents  with  railroads,  dotted 
the  prairies  with  farmhouses,  beautified  them  with  fields 
of  grain,  and  covered  them  with  herds.  The  period  has 
been  one  of  widespread  plenty,  of  remarkable  industrial 
activity  and  efficiency,  of  boundless  energy  and  hope.  It  is 
strange,  it  is  even  impossible,  that  extensive  building  opera- 
tions should,  in  themselves,  result  in  houseless  exposure ; 
that  overflowing  granaries  and  fattening  herds  should  foster 
hunger,  or  that  warehouses  of  cloth  should  be  the  sufficient 
cause  of  nakedness.  It  is  doubtless  true  that  these  meshes 
of  railroads,  these  cities  of  brick  and  iron,  these  immense 
factories  and  fattening  herds  are  largely  the  outcome  of 
reckless  hope  and  borrowed  capital ;  yet  it  all  counts  in  the 
world  as  wealth ;  it  is  here.  That  the  capital  is  borrowed 
chips  nothing  from  this  fact. 

Where  the  dangers  lie.  —  The  elements  of  danger  are  not 
to  be  found  in  the  industrial  situation,  which  was  possibly 
never  so  prosperous  in  thorough  efficiency  and  organization. 
The  difficulty  is  financial. 


282  THE  ECONOMICS  OF  ENTERPRISE 

We  have  seen  that  the  vohimc  of  exchanges  is  tlic  basis  of 
tlie  demand  for  currency ;  to  double  the  volume  of  currency- 
wit  hout  increasing  the  number  of  exchanges,  is  ultimately 
to  double  prices.  To  halve  the  currency  is  to  lower  prices 
approximately  in  the  same  ratio.  These  propositions  are 
unquestionable ;  they  hardly  reach  the  dignity  of  principles 
—  they  are  mere  mathematics.  Yet,  strangely  enough, 
as  applied  to  the  facts  of  industry  they  are  seemingly  untrue. 
Prices  almost  uniformly  rise  with  increasing  activity  in 
business,  and  fall  with  failing  business.  This  is  apparently 
to  say  that  the  values  of  currency  fall  with  an  increased 
demand,  and  rise  wdth  a  failure  of  demand. 

Why  prices  have  risen  rather  than  fallen.  —  The  explana- 
tion is  found  in  the  fact  that,  with  expanding  business, 
the  currency  also  expands,  and,  commonly,  in  a  degree 
more  than  proportionate  to  the  demand  for  it.  This  increase 
takes  place  not  ordinarily  in  the  money  element,  but  in  the 
element  of  credit.  Reviving  credit  always  characterizes  re- 
viving business.  Under  the  existing  system,  credit  furnishes 
for  currency  the  only  element  of  ready  adaptability.  It 
furnishes,  for  ordinary  conditions,  the  guaranty  of  steady 
market  prices.  It  avoids  an  enormous  application  of  human 
energies  to  the  production  of  commodity  currency.  Without 
it,  great  expanding  business  operations  would  carry  with 
them  their  own  restriction  in  falling  prices  and  vanishing 
profits. 

The  debacle  explained.  —  But  these  advantages  are 
purchased  at  the  risk  of  enormous  dangers.  The  commercial 
crisis  marks  the  period  when  money  takes  on  abnormal 
scarcity  and  abnormal  values  from  the  fact  that  substitutes 
for  money  —  credit  currency  —  contract  in  volume.  The 
very  height  of  the  credit  fabric  measures  the  disaster  of 
its  fall.  It  is  at  the  full  tide  of  prosperity  that  the  danger 
is  greatest.  If,  then,  for  any  reason,  whether  of  extravagance 
at  some  point,  or  of  overproduction  in  some  industries, 
or  of  failure  of  harvests  in  some  districts,  or  of  overspecula- 
tion,  or  even  of  business  prosperity  carried  to  the  point  of 
overstringency  in  the  loan  market,  there  sets  in  a  contraction 
of  credit,  trouble  begins.     The  debtor  can  pay  only  by  calling 


MONEY,  CREDIT,  AND  BANKING  283 

in  turn  upon  his  debtor.  The  pressure  for  payment  increases 
in  almost  geometrical  progression.  Not  only  does  credit 
largely  disappear  from  circulation,  but  the  burden  of  liqui- 
dating existing  indebtedness  is  thrown  upon  the  legal  tender 
and  the  unquestioned  elements  of  the  currency.  Panic- 
stricken  marketings  of  commodities,  and  panic-stricken 
or  speculative  withdrawals  of  money  from  the  channels 
of  business  further  complicate  the  situation.  Endless 
ruin  and  disaster  follow ;  prices  tumble  ;  this  is  panic,  when 
even  the  rich  seem  poor,  when  business  is  stagnant,  exchanges 
are  restricted,  laborers  are  unemployed  and  in  want.  Imme- 
diately preceding  it  were  the  headlong  rush  and  exultant 
activity  of  prosperity,  —  when  all  men  were  hard  at  work, 
though  doubtless  overconfident,  and  possibly  overventure- 
some.  And  now  follows  the  destruction  of  wealth.  In 
the  course  of  ample  credit,  things  had  arranged  themselves 
in  the  hands  of  those  who  knew  best  how  to  use  them.  Now 
ensues  an  enforced  redistribution.  In  the  outcome  one  man 
finds  himself  with  two  houses,  and  can  use  but  one ;  or  with 
two  horses,  and  needs  but  one ;  and  with  endless  steam 
engines  and  trumpery  and  stocks  in  trade  of  which  he  wants 
nothing.  He  can  only  let  the  property  grow  old  or  rot  or 
rust.  The  wheels  of  the  factory  stand  still ;  industry  has 
dropped  its  tools ;  and  all  this,  not  because  there  was  too 
little  wealth,  or  too  much,  but  because  what  there  was, 
was  badly  arranged  to  withstand  a  flurry  in  credit. 

The  case  for  credit.  —  It  is  clear  enough  that  panic  is 
an  ebb  in  credit,  and  that  in  proportion  as  the  intermixture 
of  credit  in  currency  is  large,  is  the  disaster  great.  Wliatever 
may  be  the  ameliorations  possible,  the  gravity  of  the  case 
is  not  to  be  questioned.  Here  is  the  most  noticeably  weak 
point  in  the  modern  competitive  system.  Anything  which 
shall  offer  a  reasonable  hope  of  displacing  credit  from  its 
enormous  development  in  modern  business  can  hardly  be 
other  than  good  fortune.  The  money  of  ultimate  redemp- 
tion is  too  small  for  the  credit  fabric  built  upon  it.  It  is 
like  a  cone  resting  on  its  apex.  This  delicate  and  unstable 
equilibrium  is  a  condition  fraught  with  constant  danger. 

Doubtless  so  long  as  credit  works,   it  affords  desirable 


281  THE  ECONOMICS  OF  ENTERPRISE 

economics  in  the  use  of  bullion  currency  and,  in  some  measure, 
steadies  prices.  England  succeeds  in  managing  a  much 
larger  per  capita  volume  of  business  than  does  France,  and 
with  a  much  lower  p(^r  capita  supplj^  of  bullion  currency. 
But  periodically  England  suffers  acutely  from  the  commercial 
crisis,  while  France  is  relatively  exempt.  The  losses  probably 
outweigh  the  gains. 

Devices  for  amelioration.  —  That  which  most  naturallj''  suggests 
itself  as  a  remedy,  is  to  enlarge  the  currency  basis,  —  to  declare  that 
more  money  of  ultimate  redemption  is  needed ;  therefore  start  the 
printing  presses  or  coin  silver.  But  remember  that  it  is  the  shape 
of  the  pjn-amid,  and  not  the  size  of  it,  which  is  matter  of  concern. 
Unless  there  is  found  to  be  some  tendency  in  silver  coinage,  or  in  any 
other  form  of  expansion,  to  lessen  the  volume  of  credit  relatively  to 
money,  the  inflation  argument  fails. 

There  is  no  such  tendency.  Silver  expansion,  or  any  other  ex- 
pansion, would  be  followed  by  a  rise  in  prices  proportionate  to  the 
expansion.  The  degree  in  wMch  credit  circulates  depends  upon  the 
methods  of  business  and  the  organization  of  industry,  and  not  upon 
the  kind  of  money.  So  long  as  manufacturers  find  it  advantageous 
to  borrow  capital,  so  long  as  wholesalers  take  credit  from  retailers, 
and  all  deposit  their  funds  in  banks  and  paj^  through  checks  and 
bookkeeping,  so  long  must  the  intermixture  of  credit  remain  an 
element  of  danger.  In  truth,  the  very  bulkiness  of  silver  would, 
in  itself,  tend  somewhat  to  increase  the  inducements  to  deposit 
methods. 

Nor  is  there  anj''  great  hope  that  these  credit  methods  will  cease 
because  of  their  dangers.  The  advantages  and  conveniences  to 
the  individual  business  man  are  too  pronounced.  Here,  again, 
indi\ddual  interests  are  not  parallel  with  the  general  interest.  No 
one  business  man  could  afford  to  stop  unless  all  should  stop,  and  each 
would  gain  by  violating  the  rule  intended  for  all.  The  remedy,  if 
any  is  possible,  Ues  in  the  discovery  of  a  currency  effectively  flexible 
in  time  of  need. 

Wiser  organization  of  banking.  —  The  foregoing  dis- 
cussion does  not,  however,  imply  that  the  banks,  which  are 
the  ordinary  sources  of  credit  currency,  can  do  nothing  as 
they  are  now  organized  against  the  breaking  out  of  a  panic, 
to  intervene  to  prevent  its  further  development  when  once 
it  is  started,  or  to  mitigate  its  severity  when  once  it  is  seri- 


MONEY,  CREDIT,  AND  BANKING  285 

ously  under  way.  Nor  is  it  true  that,  with  better  organi- 
zation, the  banks  might  not  do  even  better  than  to  arrest 
or  to  ameliorate.  How,  in  fact,  should  panics  be  handled 
by  the  banks? 

The  policy  of  more  credit.  —  The  panic  cannot  be  con- 
trolled, once  it  has  started,  by  any  policy  of  restriction  of 
credit,  })ut  only  by  generous  extension.  The  creditors 
are  hurrying  their  debtors  mostly  because  of  the  danger  of 
being  themselves  hurried,  or  because  of  the  danger  that  delay 
may  mean  that  some  other  creditor  may  by  his  prompti- 
tude make  himself  the  sole  creditor  paid  or  the  sole  creditor 
obtaining  adequate  security.  Were  really  solvent  debtors 
sure  of  obtaining  credit  in  case  of  serious  pressure,  there 
would  be  few  creditors  to  press  them. 

In  fact,  also,  if  the  creditors  were  sure  of  credit  for  them- 
selves in  case  of  need,  there  would  be  the  less  occasion  for 
pushing  the  debtors.  And  if  these  creditors,  in  turn,  were 
not  in  danger  of  being  pushed  by  other  creditors,  themselves 
straitened  in  credit  and  themselves  fearful  of  the  possible 
failure  of  the  debtor  to  obtain  credit  under  serious  need, 
this  last  occasion  of  credit  pressure  would  be  mostly  removed. 
The  banks  stimulate  a  call  upon  themselves  for  credit  by  X,  Y, 
and  Z,  when  the  banks  refuse  credit  to  the  men  in  whose  power 
it  is  to  hurry  X,  Y,  and  Z.  And  if  the  creditors  of  X,  Y,  and 
Z  make  demands  upon  them,  and  the  banks  refuse  to  give 
credit  to  X,  Y,  and  Z,  these  men  are  driven,  in  their  turn, 
to  place  pressure  upon  still  other  debtors.  The  hurry  grows 
with  the  restriction  of  credit,  and  the  further  restriction  of 
credit  adds  to  the  hurry.  The  process  is  a  geometrical 
progression.  And  immediately  that  no  one  can  get  credit 
to  pay  with,  there  is  a  frightened  scramble  to  enforce  pay- 
ment in  money,  to  get  money  to  pay  with,  to  hoard  money 
against  possible  necessities.  The  attempt  of  the  banks  to 
hold  fast  to  their  reserves  is  the  very  force  which  is  prompting 
the  taking  of  them  away;  depositors  under  pressure  are 
withdrawing  funds  to  meet  claims  in  other  centers,  or,  sus- 
picious of  the  continued  ability  of  the  bank  to  pay  upon  de- 
mand, or  suspicious  of  the  ultimate  solvency  of  the  bank,  are 
calling  for  cash  to  be  hoarded.     The  fact  that  it  is  not  nee- 


286  THE  ECONOMICS  OF  ENTERPRISE 

essary  that  a  stringency  have  already  arisen  in  order  to  bring 
about  the  panic  stringency,  but  that  only  the  menace  of  strin- 
gency is  necessary,  is  well  illustrated  in  the  London  market. 
The  Bank  of  England  has  no  authority  to  issue  more  than  a 
limited  fund  of  notes,  otherwise  than  as  mere  warehouse 
receipts  for  deposited  gold ;  and  the  legal  limit  of  its  un- 
covered issues  is  always  full.  If,  then,  panic  develops, 
reserves  are  falling,  and  the  situation  becoming  acute,  the 
government  is  likely  between  two  days  to  promise  the  later 
legalization  of  such  illegal  issues  of  notes  as  the  Bank  may 
find  necessary.  The  announcement  next  morning  of  this 
authority  and  of  the  Bank's  disposition  to  use  it  is,  not  rarely, 
enough  to  stem  the  rising  waves  of  disaster.  The  terror  is 
allayed.  As  soon  as  it  is  clear  that  all  who  need  credit  and 
deserve  it  can  get  it,  no  one  is  in  a  hurry  to  borrow  for  possible 
emergencies,  or  to  push  his  debtor,  or  to  hurry  to  pay  off 
his  creditor.  Business  returns  to  its  normal  pace  and  move- 
ment. The  Bank  need  not  have  made  even  the  slightest 
use  of  its  privilege. 

Here  in  America,  however,  the  reserve  limit  fixed  by  law 
deprives  the  banks  in  times  of  need  of  their  only  power  of 
service.  Reserves  are  mostly  waste  money  till  this  time 
of  need,  and  then  they  are  forbidden  their  only  proper 
function.  They  are  the  more  rapidly  drawn  out  by  the 
depositors  as  the  granting  of  credit  is  the  longer  refused, 
and  as  the  credit  conditions  become  less  and  less  adequate 
for  business  requirements.  And  each  dollar  of  withdrawn 
reserve  means  the  calling  and  the  canceling  of  several  dol- 
lars of  credit  substitutes. 

Organized  versus  disorganized  banking.  —  Most  experienced 
bankers  would  promptly  take  issue  upon  the  assertion  that,  for 
SIOOO  of  increase  in  reserve  funds,  from  .$4000  to  $7000  of  loan 
extension  is  possible.  These  bankers  would  argue  that  out  of  a 
$1000  loan  the  checking  operations  of  the  borrower  will  carry  $800 
of  the  borrowed  funds  into  other  banks  —  that  only  sometliine  like 
$1250  of  increased  lending  is  possible  tlirough  an  inflow  of  $1000  of 
reserves. 

From  the  point  of  \'iew  of  the  isolated  bank,  this  criticism  is 
undoubtedly  well  taken.     Only  in  case  the  bank  in  question  were 


MONEY,   CREDIT,   AND  BANKING  287 

the  only  bank  in  a  community,  and  in  the  degree  that  the  community 
were  isolated  in  business  relations  from  other  communities,  would  it 
be  true  that  the  credit  granted  by  the  bank  which  received  the  re- 
serves could  be  very  greatly  extended.  But  it  is  still  true  that 
the  same  total  amount  of  extension  would  be  possible,  only  that 
this  would  be  possible  not,  in  the  larger  part,  by  the  bank  first  ob- 
taining the  reserves,  but  mostly  by  other  banks.  The  granting  of 
credit  by  the  one  bank  means  the  transfer  of  reserves  to  other  banks. 
Each  bank,  as  it,  in  turn,  lends  to  its  customers,  is  losing  reserves  to 
other  banks,  but  is,  in  turn,  gaining  reserves  at  the  expense  of  the 
other  banks  —  if  at  the  same  time  the  banking  activity  of  these 
other  banks  is  maintained.  Here,  as  elsewhere,  the  economic 
process  appears  one  way  as  an  aggregate  and  another  way  as  viewed 
in  its  competitive  and  separatist  aspects. 

Commonly,  however,  in  the  banking  field,  the  two  lines  of  analysis 
converge  in  their  conclusions.  The  competitive  analysis,  as  the 
actual  analysis,  is  merely  somewhat  the  more  detailed  and  difficult. 
But  there  is  no  essential  need  of  this  doctrinal  unity  anywhere  ;  nor 
always  do  the  facts  of  banking  support  it.  In  truth,  it  often  happens 
that,  so  far  as  any  one  bank  is  lending,  it  is  losing  its  reserves  to  other 
banks  that  are  not  lending.  And  it  is  not  rarely  true  that  each 
particular  bank  is  deterred  from  lending  by  the  possibility  that 
other  banks  are  not  going  to  lend  :  or,  again,  it  may  be  true  that  any 
particular  bank  is  actually  prohibited  from  lending  by  the  fact  that 
the  other  banks  have  stopped  lending. 

Expansions  and  contractions  of  banking  credit.  —  The  fact  is  that 
as  banks  by  extending  their  credit  accommodations  create  the 
situation  in  which  panic  is  possible,  so,  by  a  restriction  of  credit, 
they  may  actually  bring  on  panic,  or  by  their  mutual  suspicion  and 
their  lack  of  a  harmonious  and  coordinated  policy,  may  seriously 
aggravate  a  panic  which  has  already  got  under  way  without  .their 
fault. 

The  responsibility.  —  Where,  at  any  given  time,  the  re- 
sponsibility for  panic  ultimately  rests,  may  be  difficult 
of  determination.  But  it  is  a  practical  certainty  that,  in 
a  system  of  separate  and  uncoordinated  banking  enterprises, 
the  banks  will  themselves  make  immeasurably  more  serious 
whatever  serious  thing  may  happen.  If  banking  is  to  furnish 
for  ordinary  times  the  bulk  of  the  circulating  medium, 
banking  must  continue  to  furnish  it  for  all  times.  Otherwise 
there  must  be  recurrent  disaster.     The  general  situation  of 


288  THE  ECOXOMICS  OF  ENTERPRISE 

prices  which  goes  with  the  credit  circulation  of  banks  cannot 
be  maintained  in  the  absence  of  this  circulation.  There 
must  be  no  credit  or  there  must  be  permanent  credit. 

Double-counting  of  reserves.  —  The  difficultj^  is  not 
precitii'iy  in  tlie  fact  that  some  banks  purport  to  hold  in  large 
part  —  but  actually  do  not  hold  —  the  reserves  of  other 
banks ;  that  under  our  system  of  redepositing  reserves, 
more  than  three  fourths  of  the  reserves,  computed  as  some- 
where else,  are  really  not  where  they  are  supposed  to  be, 
but  are,  instead,  still  somewhere  else  —  where,  in  turn,  they 
really  are  not,  —  and  that,  therefore,  in  times  of  stress  the 
banks  themselves  are  the  most  serious  sources  of  pressure 
upon  one  another,  —  that  the  banks  are  not  only  themselves 
among  the  very  depositors  whose  calls  are  so  disastrous, 
but  are,  of  all  the  depositors,  the  ones  likely  to  be  first  in 
their  calls,  —  although  all  this  is  serious  enough ;  the  ultimate 
difficulty  is  that  the  very  process  by  which  all  the  banks 
at  once  are  trying  to  strengthen  their  reserves  is  an  altogether 
impossible  process  —  a  paradox  —  a  death-blow  at  the  very 
fundamental  principle  of  banking.  Any  general  attempt 
to  convert  banking  paper  or  deposit  credit  into  gold  must 
promptly  issue  in  a  lamentable  collapse  of  the  whole  credit 
machinery.  The  last  people  to  make  this  attempt  should 
be  the  bankers  themselves.  If  other  interests  attempt  it, 
the  bankers'  duty  is  to  intervene  to  save  the  situation.  The 
attempt  must  in  any  case  fail,  but  all  sorts  of  calamity  must 
attend  this  effort  at  the  impossible.  When  the  banks 
themselves  join  in  the  scramble,  the  last  hope  of  supporting 
the  credit  fabric  has  vanished. 

There  are,  then,  two  serious  defects  in  the  organization 
of  American  banking,  (1)  the  double-counting  of  reserves, 
(2)  the  many-reserve  system,  —  an  evil  seemingly  on  the 
]3oint  of  receiving  its  long-deferred  remedy. 

The  double-counting  of  reserves  is  clearly  dangerous.  But 
the  pressure  by  one  bank  upon  another  is  merely  made  a 
greater  pressure,  an  aggravated  difficulty,  through  this  dupli- 
cation. It  is  not  the  less  important,  however,  to  understand 
how  the  system,   under  its  present  organization,  actually 


MONEY,  CREDIT,  AND  BANKING  289 

works ;  it  will  thereby  become  so  much  the  clearer  how  tlio 
system  of  independent  and  separate  reserves  must  inevitably 
work,  even  though  all  the  duplications  were  avoided.' 

So  long  as  fair  weather  continues,  it  does  not  much  matter 
where  the  reserves  are,  or  even  whether  there  are  any.  A 
system  including  both  the  principle  of  separate  reserves  and 
of  reduplicated  reserves  may,  for  so  long  as  it  works  at  all, 
appear  to  offer  all  the  strength  and  flexibility  that  a  system 
of  conjoined  and  centralized  reserves  could  offer.  But 
recurrently  the  present  system  does  not  work.  The  ultimate 
reserves  —  what,  in  last  analysis,  there  are  of  them  —  are 
in  large  part  held  in  New  York.  When  trouble  sets  in,  the 
25,000  banks  in  the  country  set  themselves  to  tear  down  this 
central  reserve  —  each  one  trying  to  weather  the  storm 
by  the  help  of  what  little  it  can  snatch  from  the  general 
emergency  fund.  Under  this  manner  of  treatment  the  fund 
promptly  disappears. 

The  ultimate  evil.  —  And  yet,  as  has  been  already  indi- 
cated, the  S3^stcm  of  reduplication  of  reserves  serves  merely 
to  aggravate  a  much  more  serious  and,  indeed,  a  fundamental 
evil.  We  have  seen  that  when  credit  is  being  granted  freely 
by  all  the  banks,  the  accommodations  made  by  each  bank 
work  out  to  distribute  the  aggregate  reserve  with  something 
like  proportionality  among  all  the  different  banks.  As  one 
bank,  by  its  creation  of  deposit  liability,  is  drawing  down 
its  reserves,  other  banks  are,  as  the  direct  result,  reenforcing 
their  own  reserves.  Similar  discounting  activities  on  the 
part  of  other  banks  are,  in  turn,  making  good  the  reserve 
withdrawals  from  the  first  bank.  In  practical  effect,  then, 
in  times  of  easy  and  normal  credit,  the  reserves  are  really 
combined.  Each  bank  can  shift  its  loans  to  other  banks. 
By  contracting  its  loans,  it  can  always  reestablish  the  desired 
ratio  of  safety  between  its  reserves  and  its  demand  liabil- 
ities. 

When  contraction  comes.  —  But  this  method  of  safety  is 
evidently  open  only  on  the  condition  that  the  banking  com- 
munity in  general  is  not  making  a  like  attempt  at  contraction. 
If  the  movement  becomes  general,  the  only  safety  for  each 
individual  bank  is  in  its  refusal  to  hazard  its  reserves  either 


290  THE  ECONOMICS  OF  ENTERPRISE 

by  the  granting  of  now  credit  or  by  the  extending  of  the  old. 
An  insensate  scramble  for  one  another's  reserves  sets  in. 
That  which  was  stringency  develops  into  panic.  The  differ- 
ent banks  in  the  aggregate^  system  are  now  working  at  cross 
purposes.  The  fund  which  was  held  as  reserve  for  any 
ejnerg(uicy  threatening  the  general  stability  of  the  system, 
and  for  the  maintenance  of  the  general  credit  circulation,  now 
functions  merely  as  hard-held  funds  which  are  not  available 
for  use  at  such  points  of  weakness  as  develop.  A  still  more 
severe  and  more  serious  pressure  comes  to  be  exerted  as  more 
loans  are  called  to  recnforce  reserves.  This  process,  in  turn, 
cancels  more  and  more  deposits.  The  system  is  working  as 
an  automatic  multiplier  of  the  initial  pressure.  Those 
independent  banks  which  achieve  safety  in  the  rout,  achieve 
it  only  on  terms  of  the  sacrifice  of  many  of  their  customers. 
Effects  of  restriction.  —  The  aggregate  result  is  that  the 
circulating  medium,  which  it  is  the  accepted  duty  and  func- 
tion of  the  banks  to  furnish,  has  in  large  part  disappeared. 
The  business  world  must  get  along  as  best  it  may  under  this 
radical  restriction  of  credit  and  of  credit  media  of  exchange. 
With  the  attempts  of  debtors  to  pay  their  notes  through 
marketing  their  possessions,  prices  tend  to  fall.  The  more 
frantic  the  attempt  at  marketing,  the  more  rapid  and  the 
more  marked  the  resulting  fall.  Especially  severe  and  heavy 
is  the  marketing  of  those  securities  deposited  as  collateral 
with  the  banks.  With  the  forcing  of  these  collaterals  upon 
the  market  there  goes  a  still  further  depression  in  the  market 
prices  of  them.  And  with  the  falling  prices,  the  banks  are 
calling  for  wider  margins  of  collateral  or  for  the  immediate 
payment  of  the  secured  obligations.  At  the  theoretical  limit 
of  the  process  the  typical  bank  will  have  reversed  its  original 
process  of  note  extension  and  will,  if  its  frantic  attempts  have 
availed,  have  returned  to  its  first  morning's  calm,  with 
$100,000  of  cash  in  hand,  with  no  notes  in  its  portfolio,  and 
no  borrowers'  deposits  as  liability,  but  with  a  farcically  safe 
and  conservative  ratio  of  reserve  to  demand  liabilities. 
Counting  also  the  money  which  has  accumulated  in  its  vaults 
as  the  result  of  that  ordinary  and  current  deposit  unrelated 
to  the  loan  activities  of  the  bank,  the  bank  will  show  not 


MONEY,  CREDIT,  AND  BANKING  291 

merely  an  extraordinarily  large  reserve  relatively  to  its  lia- 
bility, but  extraordinarily  large  reserves  as  an  absolute 
volume. 

Illustrations  of  the  process  just  analyzed  are  readily  found : 
For  the  fourteen  years  following  specie  resumption  in  the  United 
States,  and  preceding  the  panic  of  1893,  the  ratio  of  net  cash  to 
demand  liability  for  the  aggregate  national  banks  of  the  United 
States  had  run  approximately  at  20  per  cent,  with  the  absolute 
volume  of  cash  reaching  its  maximum  of  400  millions  in  1892,  while 
the  net  liability  was  at  a  minimum  of  1900  miUions  during  the  year 
1892  and  in  the  early  winter  of  1893.  Six  months  later,  after  the 
disastrous  summer  of  1893,  the  net  demand  hability  had  fallen  to 
1600  millions  and  the  cash  holdings  had,  in  early  1894,  risen  to  480 
millions  —  a  point  never  before  reached  and  not  later  reached  till 
1899.  This  increase  of  reserves  was  obviously  not  merely  an  in- 
crease from  20  per  cent  to  29  per  cent  of  the  demand  liability,  but 
was  also  an  absolute  increase  of  80  millions  in  the  holdings  of  cash. 
A  parallel,  though  not  an  equally  dramatic,  illustration  of  the 
same  tendency  could  be  drawn  from  the  experiences  of  1884  and 
1907. 

Where  is  the  fault?  —  No  criticism  is  here  intended  against  the 
banks  in  the  carrying  on  of  their  separate  and  independent  func- 
tions, or  against  the  managers  of  the  banks,  but  only  against  the 
actual  organization  of  the  banking  system.  The  bankers  are  merely 
the  servants  of  the  system  in  which  they  work ;  they  have  no  choice. 
But  the  fact  still  stands  that  the  leading  and  characteristic  feature 
of  the  ordinary  panic  is  the  abdication  by  the  banks  of  their  function 
of  maintaining  credit. 

The  sequence  of  contraction.  —  Taking  it  to  be  true  that 
the  commercial  crisis  is  a  phenomenon  of  the  contraction  of 
credit,  it  nevertheless  remains  to  inquire  as  to  the  sense  in 
which  this  is  true.  Is  it  either  primarily  or  exclusively  a 
contraction  of  bank  credit,  or  rather  a  contraction  of  credit 
generally?  Or  is  it  merely  a  contraction  in  some  other  spe- 
cific kind  or  level  of  credit?  May  it  not  be  a  process  of 
restriction  confined  to  what  may  be  termed  voluntary  credit, 
as  over  against  a  remaining  volume  of  credit  which  is  refusing 
to  contract  and  which  is  even  expanding? 

It  appears,  indeed,  to  be  in  need  of  recognition  that,  al- 
though the  acute  stage  of  crisis  is  purely  a  matter  of  credit 


292  THE  ECONOMICS  OF  ENTERPRISE 

contraction,  it  does  not  follow  —  and  it  is  not  true  —  that 
the  aggropite  volume  of  credit  is  diminishing.  The  process 
of  restriction  is  proceeding  only  in  certain  departments  of 
credit  or  upon  certain  credit  levels,  while  credit  is  elsewhere 
manifesting  precisely  the  contrary  tendency.  Side  by  side 
with  the  diminution  of  bank  credit  there  is  taking  place  an 
enforced  and  inevitable  expansion  of  credit  relations  between 
producers  and  consumers,  producers  and  middlemen,  and 
between  middlemen  and  consumers. 

At  this  nonbanking  level  of  credit  must  be  sought,  in  fact, 
the  explanation  for  the  more  serious  of  the  ultimate  difficulties 
characteristic  of  the  crisis  phenomenon.  So  far,  indeed,  as 
crisis  confines  itself  to  a  mere  contraction  of  bank  credit,  so 
far,  even,  as  its  effects  extend  no  further  than  a  general  re- 
appraisal of  goods  in  terms  of  gold  —  a  readjustment  of 
prices  —  nothing  is  taking  place  of  essential  significance  to  the 
interests  of  society  as  a  whole.  It  is  only  as  the  financial 
strain  somehow  translates  itself  into  an  interference  with 
the  processes  of  production  and  consumption  that  the  real  and 
essential  and  ultimate  harm  is  disclosed. 

What,  then,  is  the  method  of  this  translation,  the  rationale 
of  its  working?  Why  are  manufacturers  closing  their  mills 
and  discharging  employees  ? 

The  ultimate  social  injury  from  crises  has  sometimes  been 
interpreted  purely  in  terms  of  disturbed  production  reacting 
upon  consumption,  sometimes  also  in  terms  of  reduced  con- 
sumption reacting  to  limit  production. 

Restricted  consumption.  —  Space  must  fail  to  do  immedi- 
ate justice  to  this  second  view  —  a  view  containing  much 
truth,  and  truth  of  the  greatest  significance.  (See  pp.  300-6.) 
Some  part  of  the  difficulty  does  really  lie  in  the  fact  that, 
scared  or  depressed  by  the  purely  financial  commotion,  con- 
sumers are  refraining  from  consuming.  In  this  aspect  of  the 
problem,  nothing  appears  to  be  the  trouble  excepting  the 
sheer  indisposition  to  consume,  a  temporary  and  extreme 
economy,  an  overmarked  preference  for  postponed  consump- 
tion as  against  present  consumption.  Acting  under  similar 
influences,  retailers  are  also  doubtless  manifesting  a  similar 


MONEY,  CREDIT,  AND  BANKING  293 

psychology ;  they  are  allowing  their  stocks  to  run  low ; 
temporarily  they  are  adopting  the  policy  of  living  from  hand 
to  mouth.  And  as  the  mere  restatement  of  this  fact,  orders 
are  ceasing  to  come  to  the  wholesaler,  and  employment  is 
becoming  scant  at  the  sources  of  production. 

Doubtless  the  problem  is  extremely  complex ;  a  full  treat- 
ment of  it  must  allow  for  the  bearing  of  such  influences  as 
first  express  themselves  in  a  reduced  consumption  and  only 
so  react  upon  production.  But  the  concern  of  the  immediate 
analysis  is  solely  with  the  influences  first  impinging  upon 
production,  and  only  secondarily  affecting  consumption. 

Restricted  production.  —  How,  then,  does  the  panic  work 
out  to  tie  up  production?  In  some  small  part,  doubtless,  by 
uncovering  insolvencies  not  due  to  the  panic,  but  only  dis- 
closed by  it ;  in  some  part,  also,  the  panic  causes  insolvencies 
through  bringing  about  a  fall  in  the  prices  of  securities  or  of 
stocks  of  goods,  or,  possibly,  through  necessitating  an  impera- 
tive call  for  the  immediate  liquidation  of  credit  relations  that 
cannot  be  liquidated  immediately. 

Production  and  credit.  —  But  in  the  main  the  "  slowing  up 
of  business,"  the  restriction  of  production,  is  not  a  phenome- 
non of  insolvency ;  in  the  main,  also,  even  where  it  is  an  in- 
solvency phenomenon,  it  is  merely  as  another  effect  of  the 
very  causal  influences  which  it  is  the  present  purpose  to  ana- 
lyze. Restriction  of  production  is  mostly  due  to  a  disastrous 
redistribution  in  society  of  the  function  —  or  the  burden  — 
of  supplying  credit.  For,  as  has  already  been  noted,  the 
immediate  or  early  effect  of  crisis  is  not  to  diminish  credit. 
Credit  contraction  is  really  a  matter  of  very  slow  accomplish- 
ment ;  the  stringency  period  is  merely  a  period  of  the  redistri- 
bution of  the  function  of  carrying  credit. 

In  the  early  days  of  November,  1907,  two  or  three  weeks 
after  the  crisis  of  that  year  had  declared  itself,  a  small  man- 
ufacturing wholesaler  in  Chicago  reported  to  the  present  writer 
that  collections  had  in  two  weeks  shrunk  from  about  $1000  to 
1500  a  day,  while  raw  materials  and  other  outlays  were  run- 
ning at  about  $650  per  day.  Shipments  were  still  maintaining 
their  usual  mark  of  $1500.  But  two  weeks  later  the  report 
was  to  the  efTect  that  collections  had  fallen  to  about  $250, 


294  THE  ECONOMICS  OF  ENTERPRISE 

sales  to  about  .SGOO,  and  that  customcTs  were  sending  in  their 
notes  and  asking  time.  The  Chicago  Ijanks,  however,  were 
refusing  to  discount  these  notes.  In  essentials,  the  case  is 
typical. 

What  does  it  all  mean  as  seen  from  the  point  of  view  of  the 
entrepreneur  and  of  the  productive  process?  Simply  that 
there  is  as  yet  taking  place  no  contraction  of  credit,  but 
merely  that  the  manufacturer  or  jobber  —  either  of  whom  is 
for  the  most  part  an  intermediary  in  production  —  is  having 
to  carry  the  credit ;  the  banks  have  abdicated  their  function  of 
credit  issue.  Whether  this  is  necessarily  done  does  not  con- 
cern the  present  analysis  —  it  is  done.  What  shall  the  whole- 
saler do  —  press  his  customers  ?  But  this  is  bad  business 
in  the  long  computation,  and,  besides,  is  likely  to  be  ineffective. 
Refuse  them  further  goods?  But  this  is  inexpedient  as  long 
as  the  customers  are  actually  responsible.  The  customer  also 
finds  himself  in  a  precisely  similar  situation  with  regard  to 
his  own  trade;  he  has  to  wait  on  his  customers.  On  this 
level  of  business  activity  credit  is  successfully  resisting  con- 
traction and  is  effectively  pressing  for  expansion. 

But  on  the  basis  of  having  to  carry  his  customers  —  not 
merely  on  accrued  accounts,  but  for  further  shipments — the 
wholesaler  or  manufacturer  must  shortly  meet  the  necessity 
of  curtailing  or  abandoning  production.  And  note  that  all 
this  must  hold  true,  even  though  the  banks  do  not  also  move 
toward  cutting  down  the  line  of  credit  usually  granted.  In 
any  case,  the  pressure  upon  the  wholesaler  or  the  manufac- 
turer for  credit  is  an  increasing  pressure  from  his  customers. 
Credit  on  this  level  is  temporarily  expanding.  But  this  is 
an  impossible  process  if  attempt  be  made  to  carry  it  appre- 
ciably far,  concurrently  with  the  refusal  of  the  banks  to 
grant  an  increasing  accommodation.  Producing  and  distrib- 
uting are  therefore  subjected  to  paralysis. 

Responsibility  and  credit.  —  Nor  does  it  greatly  matter, 
for  the  purpose,  how  unquestionably  solvent  the  manufac- 
turer or  the  jobber  may  be,  or  how  great  claim  he  may  have  to 
credit  by  title  of  financial  strength.  The  difficulty  is  not 
that  his  net  resources  are  not  adequate  for  all  purposes  of 
protection  to  the  bank  by  way  of  indorsement  and  guaranty. 


MONEY,  CREDIT,  AND  BANKING  295 

The  banks  refuse  the  credit ;  the  manufacturer  and  jobber 
have  imposed  upon  them  this  function.  But  manufacturing 
and  mercantile  businesses  are  at  the  farthest  possible  remove 
from  the  ability  to  stand  as  ultimate  purveyors  of  credit. 
Banks  are  properly  organized  to  do  the  thing,  because  they 
have  the  machinery  for  the  maldng  of  one  man's  deferred- 
payment  promise  into  immediate  purchasing  power  lOr  the 
promisee.  This  is,  in  fact,  the  leading  significance  of  the 
deposit-credit  system.  But  the  middlemen  in  production  or 
in  commerce  have  no  devices  or  adjustments  appropriate  to 
the  problem.  If  credit  organizations  cease  to  perform  their 
functions  and  attempt  to  shoulder  the  burden  off  upon  other 
lines  of  business,  these  others  must  in  their  turn  cease  to 
perform  their  appropriate  functions,  simply  because  they  can- 
not perform  both  their  own  functions  and  those  of  the  banks. 

Control  of  panic.  —  The  foregoing  is,  however,  merely  an- 
other way  of  enforcing  the  established  doctrine  that,  in  times 
of  especial  credit  pressure,  it  is  the  business  of  the  banks  to  be 
especially  liberal  of  credit.  If,  then,  the  hard  and  fast  re- 
serve limitation  interferes,  it  should  forthwith  be  repealed ; 
if  to  fulfill  their  responsibilities  the  banks  must  somehow  get 
together  for  joint  action,  they  should  be  authorized  —  or 
compelled  —  to  undertake  the  necessary  organization ;  if 
the  custom  of  depositing  reserves  with  other  banks  works  out, 
in  fair  weather,  as  a  stimulus  to  speculative  activity  in  reserve 
centers,  and,  in  bad  weather,  results  in  an  automatic  cancella- 
tion of  reserve  resources,  this  double  or  triple  counting  of 
reserves  should  be  promptly  outlawed.  By  one  device  or 
another  the  banks  should  be  held  to  the  responsibilities  of 
their  function  —  the  supplying  at  all  times,  and  especially 
in  times  of  stress,  of  all  that  credit  in  guarantee  of  which  any 
applicant  is  able  to  offer  the  adequate  security  and  for  which 
he  stands  ready  to  pay  the  ruling  rates  of  interest.  ,.  ^' 

Post-Panic  Depression. 

Rising  prices  and  dividends.  —  Rising  prices  upon  con- 
sumption goods  during  the  period  of  easy  and  expanding 
credit  must  be  attended  by  rising  prices  upon  the  equipment 


296 


THE  ECONOMICS  OF  ENTERPRISE 


goods  and  upon  the  raw  materials  and  the  labor  entering 
into  the  consumable  products.  But  precisely  because  these 
higher  prices  for  the  intermediate  goods  are  derived  from  the 
higher  prices  of  their  products,  the  rise  in  the  price  of  the 
intermediate  good  follows  more  or  less  belatedly  after  the 
rise  in  the  consumption  goods.  The  years  of  easy  and 
expanding  credit  are,  therefore,  years  of  wide  margins  of 
gain  to  enterprise  —  years  when  tlie  employers  obtain 
some  indemnity  for  the  long  drag  of  the  preceding  de- 
pression. The  period  is,  therefore,  a  time  of  high  dividends 
upon  corporate  stocks,  and  therewith  of  advancing  market 
prices  for  these  stocks.  And  as  the  prices  of  the  stocks  go 
higher  with  the  higher  dividends,  more  liberal  loans  can  be 
made  against  the  stocks  as  collateral.  Thus,  the  larger 
credits  granted  and  the  larger  deposit  liabilities  of  the  banks 
make  possible  still  higher  general  prices.  And  these  higher 
prices  make  possible,  in  turn,  still  higher  levels  of  dividends 
and  of  derived  market  prices  on  the  stocks.^ 

^  Starting  with  the  lowest  quotations  of  railroad  stocks  in  1896, 
and  selecting  the  highest  market  records  of  each  later  j^ear  in  suc- 
cession, the  following  quotations  are  offered  in  illustration  of  the 
movement  under  analysis  : 


Atch. 

St.  Paul 

III. 

Cent. 

Mo.  Pac. 

N.Y. 

Cent. 

U.  P. 

C.&  N.W. 

1896 

8 

59 

84 

15 

80 

3 

85 

1897 

17 

102 

110 

40 

115 

27 

132 

1898 

19 

120 

115 

46 

124 

44 

143 

1899 

24 

136 

122 

52 

144 

51 

166 

1900 

48 

148 

133 

49 

145 

81 

172 

1901 

91 

146 

154 

124 

174 

133 

215 

1902 

95 

198 

173 

125 

168 

113 

271 

1903 

89 

183 

151 

115 

156 

104 

224 

1904 

89 

177 

159 

111 

145 

117 

214 

1905 

93 

187 

183 

110 

168 

151 

249 

1906 

110 

199 

184 

106 

156 

195 

240 

1907 

108 

157 

172 

92 

134 

183 

205 

1908 

101 

152 

149 

67 

126 

184 

185 

1909 

125 

165 

162 

77 

147 

219 

198 

1910 

124 

158 

147 

73 

128 

204 

182 

1911 

116 

133 

147 

63 

115 

192 

150 

1912 

112 

114 

141 

47 

121 

176 

145 

MONEY,  CREDIT,  AND  BANKING  297 

The  further  process.  —  And  not  merely  this  :  but  the  same 
cumulative  interaction  between  the  extension  of  credit  and 
the  rising  prices  of  goods  and  securities  manifests  itself  in  a 
still  more  direct  way.  We  have  already  noted  that  borrow- 
ing is  largely  done  in  order  to  finance  production,  and  that 
the  expected  selling  price  of  the  product  not  only  motivates 
the  disposition  of  the  entrepreneur  to  borrow,  but  fixes  the 
limit  to  which  the  lender  is  disposed  to  go  in  the  extension  of 
credit.  Thus  falling  prices  discourage  both  borrowers  and 
lenders.  So,  rising  prices  increase  both  the  ability  to  borrow 
and  the  disposition  of  banks  to  lend.  The  loans  granted, 
with  the  deposit  credits  derivative  from  them,  again  raise  the 
prices,  and  so  on,  seemingly  without  end. 

Then  narrowing  margins.  —  But  there  comes  an  end  ;  and 
the  influences  which  bring  it  are  of  two  sorts  :  (1)  The  banks 
experience  increasing  difficulty  in  maintaining  reserves  ade- 
quate to  their  expanding  liability.  With  higher  prices  in 
general,  requirements  for  pocket  money  and  for  the  cash 
transactions  of  everyday  business  are  increasing.  Not  only, 
then,  are  the  reserves  of  the  banks  falling  relatively  to  the 
liabilities,  but  these  reserves  are  likely  even  to  be  falling 
absolutely.  (2)  With  the  restricted  power  of  the  banks  to 
expand  their  credit  circulation,  there  goes  also  a  less  rapid 
expansion  in  the  demand  for  credit.  Not  only  are  the  prices 
of  products  rising  less  rapidly,  or  even  are  remaining  station- 
ary, but  the  prices  of  raw  materials,  and  especially  the  wages 
of  labor,  are  approaching  nearer  to  a  level  corresponding  to 
the  prices  of  the  finished  products.  Thus,  the  margins  of 
gain  are  narrowing,  and  dividends  upon  stocks  are  becoming 
less  generous.  With  these  falling  dividends,  the  market 
prices  of  the  securities  are  also  falling  and  their  availability  as 
collateral  for  credit  is  shrinking.  (Observe  the  general  trend  in 
the  prices  of  railroad  stocks  since  1905-1906.     Note,  p.  296.) 


The  foregoing  discussion  is  to  our  immediate  purpose  as 
throwing  light  on  the  movements  of  prices  in  times  of 
financial  reverse.     What  is  there  in  the   long  drag  which 


298  THE  ECONOMICS  OF  ENTERPRISE 

follows  the  crisis  to  paralyze  the  processes  of  production? 
For  ultimately  it  is  not  the  credit,  or  the  margins,  or  the 
prices  which  are  of  concern  to  the  general  well-being,  but  only 
the  volume  of  products  for  consumption. 

We  have  already  seen  that  the  first  effect  of  the  abdication  by  the 
banks  of  their  function  of  credit  issue  is  not  primarily  to  occasion  a 
restriction  of  the  aggregate  of  business  credit,  but  only  a  restriction 
on  the  banking  level;  there  is  really  an  expansion,  enforced  but 
real,  on  the  wholesale  and  distributing  level.  But  the  hmits  to  which 
this  sort  of  expansion  can  go  are  rigid.  If  the  manufacturers  and 
wholesalers  can  continue  to  sell  only  through  constant  extensions  of 
credit,  selling  must  shorth^  cease.  So  with  the  retailer  in  his  rela- 
tion to  his  customers.  And  the  customers,  in  turn,  if  they  must  buy 
for  cash,  are  restricted  in  their  bujdng.  It  is  thus  evident  that 
while  the  producers'  ability  to  maintain  production  is  suffering,  the 
demand  for  goods  is  also  suffering.  The  aggregate  product  of  society 
is  diminishing.  But  it  is  not  quite  clear  upon  wliich  side,  the  supply 
or  the  demand,  the  causation  is  in  the  main  to  be  located.  All  that 
can  safely  be  said  is  that  the  denial  of  credit  by  credit  institutions 
—  the  sliifting  of  the  burden  to  shoulders  inapt  to  bear  it  —  is 
interfering  both  with  production  and  with  consumption.  The  net 
result  is  a  smaller  total  of  product  in  society.  The  crisis  itself  has 
some  very  prompt  effects  upon  production. 

But  a  longer-time  view  discloses  another  and  a  still  stronger 
influence  making  for  a  restriction  of  production.  We  enter 
upon  the  problem  of  depressions. 

The  unequal  fall  in  prices.  —  The  business  of  the  entrepre- 
neur is  to  make  profits.  He  has  no  concern  with  social 
welfare.  He  faces  the  following  problem :  In  the  fall  of 
prices  after  a  panic  not  all  commodities  fall  with  equal 
rapidity.  Goods  from  foreign  sources,  for  example,  may 
nearly  or  quite  hold  their  old  level  of  prices.  Other  products 
are  perhaps  produced  under  conditions  more  or  less  approach- 
ing monopoly ;  others  again  may  be  well  sustained  in  price, 
through  speculative  holdings  by  the  producers  or  through 
restrictions  of  product.  The  entrepreneur  must  produce  in 
view  of  market  prices.  Prices  are  his  master.  If  his  produc- 
tive outlays  are  too  high,  he  must  withdraw  from  business. 
There  is,  however,  for  most  employers  one  resource  and  one 


MONEY,  CREDIT,  AND  BANKING  299 

only  —  that  of  reducing  wages.  A  small  reduction  may  per- 
haps be  sufficient.  But  here  is  precisely  the  kernel  of  the 
difficulty.  Even  were  raw  materials  for  all  industries  falling 
regularly  and  equally,  the  entrepreneur  would  still  be  com- 
pelled by  lower  prices  of  product  to  reduce  the  wages  paid. 
As  a  practical  fact,  this  is  a  difficult  matter.  Laborers  resist 
angrily  and  persistently.  They  do  not  understand  the  neces- 
sity of  the  reduction  —  they  believe  that  they  have  merely  to 
stand  firm.  To  prevent  a  strike  or  a  long  continuance  of 
strained  relations,  the  employer  often  finds  it  not  less  profit- 
able, and  much  more  comfortable,  to  close  his  shop.  In 
times  of  depression  margins  are  scant  enough  at  the  best. 

Inertia  is  a  fact  which  must  be  reckoned  with.  Wages 
rise  slowly  and,  when  fall  is  inevitable,  fall  slowly  and  with 
painful  struggle.  Public  opinion  concurs  with  difficulties  in 
business  to  impel  the  factory  owner  to  quit  the  contest. 
Competition  among  wage  seekers  does  not  protect  him.  If 
the  industry  requires  skilled  labor,  he  cannot  readily  re-man 
his  factory  —  the  unemployed,  even,  are  loath  to  present 
themselves  for  the  vacant  places.  Ostracism  is  visited  upon 
them  if  they  do,  and  they  are  even  prevented  by  force. 

The  frictions  of  readjustment.  —  Were  it  possible  for  prices 
to  fall  evenly  all  along  the  line,  the  depression  following  upon 
panic  would  be  less  important  and  of  shorter  duration.  But 
(1)  as  long  as  indebtedness  does  not  fall  as  measured  in  money 
units,  there  is  tremendous  resistance  —  in  many  cases  a 
struggle  for  very  financial  existence  —  against  sale  and 
liquidation  at  the  ruling  level  of  prices.  Even  were  this 
difficulty  avoided,  as  will  be  shown  to  be  possible,  there 
would  still  remain  (2)  the  difficulty  of  accurately  ad- 
justing wage  payments  to  market  prices.  Capital,  labor, 
and  employer  must  cooperate  in  production.  If  from 
their  employer  laborers  insist  upon  all,  or  more  than  all, 
of  the  product,  production  must  suffer.  The  marginal 
principle  applies  here  in  an  important  manner.  Those 
employers  hardest  pushed  by  the  demands  of  employees, 
or  those  least  able  or  least  disposed  to  continue  production  on 
narrow  margins,  close  the  doors  of  their  factories. 

This  analysis  points  to  large  advantages  in  the  commodity 


300  THE  ECOXOMICS  OF  ENTERPRISE 

standard  i)f  ]iayinents,  ospocially  as  applied  to  attempts  to  fix 
upon  a  basis  of  agreement  between  employers  and  employees. 

Post-panic  depression  and  under-consumption.  —  But 
will  the  same  lines  of  explanation  serve  also  for  the  industrial 
situation  in  the  post-panic  period,  prolonged  as  it  is  in  some 
cases  to  the  better  part  of  a  decade?  The  processes  and  the 
causes  immediately  following  upon  the  crisis  time  are  fairly 
clear.     But  depressions  are  mostly  unknown  land. 

The  main  issue,  however,  in  the  depression  problem  is 
easily  formulated :  Is  the  depression  to  be  interpreted  in 
terms  (1)  of  disturbed  production  reacting  upon  consump- 
tion, or  rather  (2)  of  disturbed  consumption  reacting  upon 
production  ? 

That  production  has  been  seriously  thrown  out  of  gear  by 
the  crisis  requires  no  further  emphasis  ;  but  that  things  are  so 
wearily  slow  in  recovering  is  our  present  problem.  Crises 
are  one  thing,  depressions  another.  After  the  crisis  there 
follows  a  long  period  of  idle  and  surplus  resources  and 
equipment.  Prices  are  low.  Yet  the  bankers  have  plenty  of 
money  for  loan  and  plenty  of  reserves  for  the  extension  of 
credit  accommodations.  Credit  is,  indeed,  abnormally  easy 
for  any  one  whose  security  is  acceptable,  the  only  difficulty 
being  that  the  few  who  can  get  the  credit  do  not  want  it,  and 
that  the  few  who  want  it  cannot  get  it.  Interest  rates  are 
low  upon  such  loans  as  are  made. 

Easy  credit,  falling  prices,  diminishing  consumption.  — 
Why,  with  all  this  plenitude  of  money,  and  with  these 
ample  reserves  for  credit,  are  prices  also  so  low?  Is  the 
explanation  in  overproduction?  But  the  economists  deny 
that  overproduction  is  a  possibility.  Is  it  discouraged  pro- 
duction lasting  over  from  the  panic  —  insolvent  businesses, 
plants  either  under  foreclosure  or  closed  for  lack  of  prospects 
of  gain?  Why,  with  so  many  competitors  crippled,  is  there 
this  bad  outlook  for  such  of  the  producers  as  have  weathered 
the  storm  ?  Wages  surely  have  fallen  low  enough  ;  the  wage 
earners  are  frantic  in  their  search  for  employment,  are  starv- 
ing, will  work  for  anything  they  can  get.  Raw  materials 
were  never  so  cheap.     Why  do  not  things  move  ? 


MONEY,  CREDIT,  AND  BANKING  301 

Can  it  really  bo  true  that  there  is  no  market  for  the  prod- 
ucts ?  The  rural  laborer  is  wanting  work  and  the  city  dweller 
is  wanting  food,  and  both  are  wanting  clothes.  And  still 
there  is  no  work.  And  in  face  of  all  this  dire  want,  there  are 
still  people  to  talk  of  overproduction  or  of  underconsump- 
tion. How  can  there  be  overproduction  ?  or  underconsump- 
tion —  which  looks  like  an  evasive  and  timid  way  of  saying 
the  same  thing  ?  How  can  goods  in  general  be  in  oversupply 
so  long  as  the  desires  of  men  are  still  unsatisfied  —  are,  in- 
deed, farther  than  ever  from  satisfaction? 

Can  there  be  overproduction? — The  classical  argument 
against  the  possibility  of  general  overproduction  —  of  a 
general  glut  —  appears  on  the  face  of  it  to  be  conclusive. 
Supply  and  demand  are  merely  different  ways  of  regarding 
the  total  of  products  :  each  man's  products  are  a  demand  for 
other  men's  products.  To  increase  the  general  supply  of 
goods  is,  then,  to  increase  the  general  demand  for  goods. 
True,  these  goods  are  exchanging  one  against  another  through 
money  as  the  intermediate.  But  no  matter;  suppose  that 
barter  were  the  only  exchange  method :  what  could  it 
mean  to  say  that  the  supply  of  goods  was  greater  than 
the  demand  for  them?  The  more  of  each  thing,  the  more 
of  other  things  to  exchange  against  it.  True,  some  goods 
may  be  relatively  overproduced ;  but  is  it  not  clear  that 
not  all  the  goods  can  be  relatively  overproduced?  So  runs 
the  argument. 

Money  complicates  the  problem,  —  But,  after  all,  the  fact 
that  there  is  a  money  intermediate  has  something  to  do  with 
the  problem.  What  must  happen  if  the  possessors  of  goods 
really  do  not  want  to  barter  these  for  other  goods,  but  only  to 
get  hold  of  money  and,  for  the  time  being,  to  stop  there? 
What  if  for  a  while  the  intermediate  is  receiving  a  marked 
and  extraordinary  emphasis  —  is  sought  for  substantively, 
rather  than  as  intermediate  —  is  held  as  provision  against 
the  pressure  of  creditors,  or  for  the  purpose  of  later  speculative 
purchases,  or  for  some  other  end  remote  enough  so  that  the 
money  has  lost  temporarily  its  function  of  serving  as  inter- 
mediate in  the  exchange  of  present  products  against  other 
present  products  ? 


302  THE  ECONOMICS  OF  ENTERPRISE 

Money  as  option  of  delay.  —  It  is  strange  that  the  use  of 
money  as  a  "  storehouse  of  value  "  should  have  escaped  at- 
tention in  this  regard.  The  use  of  money  as  current  inter- 
mediate shades  off  by  insensible  gradations  into  the  use  as 
deferred  intermediate  and  into  the  use  as  intermediate  in 
deferred  payments.  The  classical  argument  is  inadequate 
precisely  because  the  intermediate  commodity  is  present  with 
its  possibility  of  postponed  outlay,  and  because  all  the 
phenomena  of  the  deferred  payment  relation  are  present 
also.  Goods  have,  in  truth,  to  be  conceived  in  another 
aspect  than  this  solely  of  present  goods  against  present 
goods ;  the  case  sometimes  presents  itself  as  one  of  present 
goods  against  future  goods ;  and  for  this  purpose  moneys  and 
credits,  as  the  form  of  quid-pro-quo  into  which  existing  goods 
are  seeking  exchange,  may  at  one  time  be  receiving  a  much 
more  marked  emphasis  than  at  another  time.  When  the 
exaggerated  desirability  of  jDOstponed  consumption  obtains, 
the  demand  for  ordinary  commodities  slackens.  The  prob- 
lem then  transforms  itself  into  this  —  how  shall  men,  in  the 
average,  increase  their  production  and  sale  of  goods  con- 
sistently with  a  diminished  buying  and  consuming  of  goods  ? 
And  not  only  is  it  true  that  in  time  of  depression  present 
goods  are,  in  large  part,  likely  to  be  offered  only  against 
money  rather  than  against  other  goods ;  but  it  is  true,  also, 
on  the  money  side,  that  money  itself  is  disappearing  as  a 
demand  for  existing  present  goods.  Goods  are  offering 
against  present  money,  while  money  is  offering  only  against 
promises  to  pay  in  later  goods  or  in  later  money  with  which 
presumably  to  command  later  goods.  In  large  part,  then, 
present  goods  are  failing  to  exchange  against  present  goods. 
The  offers  of  present  goods  are  not  for  present  goods,  and  the 
offers  of  present  money  are  not  offers  for  present  goods. 

Exaggerated  emphasis  upon  the  future.  —  Somewhere, 
then,  in  this  neglected  field  may  well  be  sought  the  solution 
of  our  problem.  It  is  possible,  surely,  that  present  goods 
should  fail  to  find  a  market,  so  far  as  these  goods  are  merely  a 
demand  for  money  or  for  deferred  purchasing  power.  There 
is  implied  no  lack  of  human  need  or  desire,  but  merelj^  a 
situation  in  which  foreseen  future  needs  are  outranking  in  the 


MONEY,   CREDIT,  AND  BANKING  303 

present  estimate  the  actual  present  needs.  In  a  situation  of 
this  sort,  present  money,  or  well-secured  promises  of  future 
money,  may  easily  acquire  an  extraordinary  command  over 
present  consumable  goods.  The  traders  willing  to  offer  the 
present  money,  or  able  to  offer  the  adequately  secured 
promises  of  future  payment,  are  not  numerous.  Falling 
prices  necessarily  result. 

A  general  fall  in  prices  may  not  stimulate  consumption.  — 
Nor  is  it  at  all  clear  that  these  falling  prices  will  avail  to 
market  the  normal  supply  of  goods  or  to  terminate  the  glut 
on  any  other  terms  than  of  enforcing  a  greatly  restricted  pro- 
duction. If  prices  are  falling  —  the  exchange  power  of 
money  over  present  goods  rising  —  so  also  is  rising  its  puta- 
tive future  purchasing  power.  Rather  is  it  true  that  for  so 
long  as  the  current  psychological  attitude  prevails,  there  can 
be  an  adequate  market  for  only  those  commodities  minister- 
ing to  the  more  primary  of  human  needs. 

Under  consumption  actual.  —  The  fact  is  that,  in  time  of 
depression,  the  volume  of  the  exchange  medium  offering 
against  goods  is  a  grievously  restricted  volume.  The  dis- 
position toward  oversaving  prevails.  True,  there  is  money 
enough  ;  no  one  has  been  tempted  to  destroy  any  part  of  the 
existing  supply.  But  money  which  is  in  the  cellar  or  in 
bank  vaults  is  not  circulating  money.  It  is  retired,  with- 
drawn. For  all  current  purposes,  it  might  as  well  never  have 
been  mined,  or  have  been  sunk  in  the  sea.  Were  it  really 
functioning  as  bank  reserves,  it  might  be  supporting  several- 
fold  its  volume  of  circulating  credit.  But  in  no  effective  sense 
is  it  a  part  of  reserves.     It  is  altogether  idle. 

When  will  it  emerge  from  its  hiding?  Much  of  it  awaits  in 
speculative  watchfulness  the  time  when  things  shall  have 
"  touched  bottom,"  and  will  emerge  at  such  time  as  other 
hoards  appear  ready  also  to  emerge  :  when  the  rest  are  ready, 
all  will  be  ready.  Other  of  this  retired  purchasing  power 
will  some  day  come  to  realize  that  prices  must  finally  turn 
toward  rise  —  that  the  buying  power  of  money  over  con- 
sumption goods  has  already  reached  its  maximum,  and  that 
to  invest  in  deferred  payments  is  to  submit  to  great  and  pur- 
poseless loss.     Still  other  of  the  currency  in  hiding  is  awaiting 


304  THE  ECONOMICS  OF  ENTERPRISE 

the  return  of  a  more  genial  temper  toward  the  consumption 
of  wealth  —  for  a  reinstatement  of  a  standard  of  living  com- 
mensurate with  the  productive  powers  at  human  disposal. 

It  is,  tiicn,  to  be  n'C()j;nize(l  tliat  the  jicriod  of  depression  is  a 
period  of  a  lowered  standardofliving,of  a  general  conviction  of 
being  poor,  of  an  exaggerated  care  for  the  future,  of  the  starv- 
ing of  present  needs  in  oversolicitude  for  future  requirements 
—  a  restriction  of  j^rescnt  cousumi)tion  in  the  hope  of  minis- 
tering to  a  larger  consumj^tion  in  tlie  future. 

But,  taken  in  the  average,  this  hope  is  doomed  to  disap- 
pointment. It  is  —  when  so  widely  held  —  sheer  error  and 
delusion.  There  is  no  one  to  sell  to,  no  one  to  lend  to.  For 
how  shall  everj^  one  extend  his  production  beyond  his  con- 
sumption, and  sell  his  surplus  to  some  one  else? 

Savings  and  investment.  —  But  why  may  not  investment 
solve  the  problem  ?  There  is  always  a  market  for  savings  in 
prosperous  years ;  why  shoukl  there  not  be  a  market  now  ? 
But  prosperous  years  are  a  period  of  an  extraordinarily  high 
per  capita  productiveness  of  goods.  All  productive  energies 
have  been  fully  employed,  enterprise  functioning  at  the  ex- 
treme of  pressure.  The  demonstration  of  this  is  convincingly 
found  in  the  prevailingly  high  level  of  consumption ;  with 
every  wage  earner  there  goes  the  full  dinner  pail.  Among  the 
laborers  there  takes  place  a  high  average  consumption  of 
clothing,  of  minor  comforts  and  of  luxuries.  Not  only  this, 
but  the  social  production  has  been  sufficiently  large  to  permit, 
over  and  above  immediate  necessities,  the  acquisition  of  a 
great  supply  of  durable  consumption  goods  —  more  and  bet- 
ter personal  belongings,  books,  pictures,  household  furnish- 
ings. Meanwhile,  also,  in  the  more  distinctly  capitalistic 
field,  the  high  social  productiveness  has  made  possible, 
through  saving,  the  construction  of  miles  and  miles  of  new 
dwellings  and  of  business  blocks,  new  streets  with  grading, 
paving,  and  sewers,  and  generally  the  extension  of  all  sorts 
of  public  improvement  and  the  development  of  all  sorts  of 
quasi-public  utilities. 

And  how  was  it  all  possible?  Doubtless  the  ultimate 
explanation  must  lie  in  the  surpassing  volume  of  production ; 


MONEY,  CREDIT,  AND  BANKING  305 

but  within  this,  and  made  possible  by  it,  was  the  enormous 
volume  of  saving. 

Saving  connotes  lending.  —  But  how,  in  the  existing 
economic  organization,  does  this  saving  take  place  ?  Usually, 
as  we  have  seen,  through  the  restricted  consumption  of  some 
individuals  or  classes  of  society,  and  the  transfer  of  this  saved 
purchasing  power,  this  loan  fund,  to  others,  mostly  or  largely 
for  the  purposes  of  the  creation  of  new  equipment  for  pro- 
duction. It  is,  then,  mainly  the  need  of  new  railroads,  new 
factories,  new  appliances,  and  new  equipment,  that  has  fur- 
nished the  market  for  new  savings  and  the  possibility  that 
these  new  savings  should  express  themselves  in  an  increasing 
volume  of  productive  equipment.  But  when  the  market  will 
no  longer  absorb  the  product  of  the  existing  factories,  there  is 
no  occasion  to  build  more  factories  or  to  borrow  for  more 
equipment.  When  the  railroads  cannot  employ  their  pres- 
ent rolling  stock,  they  will  not  borrow  to  construct  more. 
When  the  dividends  are  suffering,  new  lines  of  road  will  not  be 
built.  The  market  for  savings  has  disappeared.  Business 
men  and  corporations  are  not  extending  their  operations. 
There  are  already  more  goods  than  can  be  sold,  more  houses 
than  can  be  rented,  more  public  improvements  than  the  tax- 
payers are  willing  to  pay  taxes  for.  It  is,  then,  evident  that 
if  savings  will  not  capitalize  into  forms  of  intermediate  social 
wealth,  there  can  be  no  market  outlet  for  the  savings,  unless 
it  be  in  consumption  loans,  that  is,  in  class  indebtedness, 
dubiously  secured,  or  in  government  wastes  and  government 
wars. 

The  nature  of  depressions.  —  We  are,  then,  within  reach 
of  our  conclusions  :  with  the  restriction  of  the  disposition  to 
consume,  there  is  neither  the  market  to  absorb  the  productive 
output  of  society,  nor  even  the  market  to  employ  the  existing 
productive  equipment.  Capitalization  cannot  take  place. 
Savings,  in  any  considerable  volume,  become  an  impossi- 
bility because  of  no  market  for  them  ;  there  is  nothing  for  the 
case  but  a  sharp  restriction  of  the  productive  output  of  society. 
A  temporary  lowering  in  the  general  standard  of  living  takes 
place.  Meanwhile  some  tendency  is  manifest  toward  the 
displacement   of   labor   through   competing   surplus-capital 


306  THE  ECONOMICS  OF  ENTERPRISE 

equipment,  to  the  extent,  that  is,  that  the  existing  supplies  of 
instrumental  goods  are  adapted  to  serve,  in  relation  to  labor, 
rather  as  substitutionary  than  as  complementary  goods. 
In  large  part,  however,  it  is  true  that  the  existing  capital 
goods  are  rather  complementary  than  substitutionary  in  their 
technological  relation  to  labor,  and  that  thereby  labor  re- 
ceives emploj'ment  so  far  as  the  capital  itself  is  able  to  find 
employment. 

Sating,  Luxury,  Charity,  Waste. 

But  this  analysis  brings  us  in  presence  of  one  of  the  most 
perplexing  of  economic  problems ;  how  far  is  saving  good  in  society 
anyway?  Is  there  not  truth  in  the  popular  notion  that  the 
receivers  of  income  must  for  the  general  welfare  spend  —  that 
money  must  be  kept  in  circulation? 

There  can  surely  be  no  question  that  savings  may  go  into  direc- 
tions of  private  capitalization  that  are  injurious  to  society  in  the 
aggregate.  The  easy  assumption  that  private  capital  means 
always  social  service,  is  silly  optimism.  If  the  result  is  merely  one 
more  monopoly,  or  another  Celery  Compound  factory,  or  more 
gambling  dens,  or  a  merger  of  brothels,  or  a  "  slush  fund  "  for  pohce 
demoralization,  or  an  investment  in  favoring  legislation  —  society 
could  clearly  have  got  on  better  without  the  saving. 

But  the  fact  of  unsocial  capitalization  does  not  present  the  serious 
theoretical  problem :  Is  all  saving  well,  even  upon  the  assumption 
that  all  of  it  be  saving  which  adds  to  the  aggregate  social  equipment  ? 

It  is  unquestionably  possible  ior  the  individual  to  make  the  mis- 
take of  dying  too  rich;  he  might  better  have  lived  more  richly. 
There  is  small  wisdom  in  the  hoarding  of  supplies  of  nuts  until  one 
has  no  teeth  with  which  to  crack  them.  Youth  is  the  time  when  de- 
sires are  keen  and  goods  are  rich  in  service.  Nor  is  wise  individual 
provision  against  old-age  penury  certain  to  be  limited  at  a  wise 
social  aggregate  of  saving.  No  doubt  there  are  dangers  of  untimely 
death  against  which  individual  saving  needs  provide,  as  there  are 
also  dangers  of  death  too  long  delayed,  against  which  provision  must 
be  accumulated. 

Note,  however,  that  the  individual  who  endeavors  to  provide 
against  the  needs  of  old  age  —  of  living,  say,  beyond  seventy  years 
—  must  recognize  the  possibility  of  twenty-seven  years  of  further 
living.  But  were  100  men  to  pool  their  issues  in  this  regard,  achiev- 
ing the  benefit  of  the  principle  of  the  general  average,  there  would 


MONEY,   CREDIT,  AND  BANKING  307 

be  need  of  provision  for  only  seven  years.  Nor  can  any  one  man 
know  that  he  is  or  is  not  to  reach  the  age  of  seventy.  Acting  inde- 
pendently, he  must  make  full  provision  for  the  full  possibility  of 
life.  But  out  of  100  men  thirty-five  years  of  age  less  than  one  half 
will  reach  the  age  of  seventy.  A  pooling  of  issues  here  would  further 
reduce  the  volume  of  saving  by  more  than  50  per  cent. 

If,  then,  individual  saving  is  to  be  justified  in  its  social  aspects, 
it  must  be  by  the  fact  that  savings  are  directed  to  the  increasing  of 
social  equipment,  and  that  there  are  room  and  need  for  the  expand- 
ing supply. 

How  great  an  increase  in  equipment  can  a  given  total  of  labor  ab- 
sorb? The  substitution  of  instrumental  goods  for  labor  is,  as  we 
have  seen,  a  limited  process.  But  how  far  can  improvement  in 
quality  and  efficiency  and  expensiveness  of  equipment  go  ?  No  one 
knows.  The  degree  is  mostly  a  question  of  the  development  of  in- 
dustrial technique.  After  the  uncivihzed  man  has  provided  himself 
with  one  or  two  boats  and  a  fair  supply  of  poles  and  lines,  he  will 
do  ill  to  increase  his  supply  in  these  directions.  So,  for  the  more 
skilled  workman,  there  is  a  limit  to  the  number  of  shovels,  plows, 
reapers,  or  looms  that  he  can  adequately  use  or  tend.  So  also  the 
point  of  capital  saturation  is,  in  any  society,  in  considerable  meas- 
ure a  question  of  the  standard  of  comfort,  and  of  the  development 
of  varied  directions  of  consumption ;  but  in  any  given  situation 
there  is  a  limit.  Again,  while  in  a  collectivist  society,  hazards  of 
criminal  predation  would  be  inconsiderable,  other  hazards  of  loss 
with  passing  time  would  need  to  be  considered  —  dangers  of  fire, 
and  of  water,  and  of  wind,  and  of  decay.  In  an  environment  earth- 
shaking,  like  that  of  Japan,  the  same  rational  preference  as  with  the 
Japanese  would  exist  for  one-storied  unsubstantial  architecture. 
And,  finally,  the  law  of  diminishing  utility  with  expanding  supply 
would  have  its  application. 

But  assuming,  as  under  present  conditions  we  probably  safely 
may,  that  there  is  still  room  in  general  for  the  indefinite  addition 
of  equipment  goods,  and  assuming,  also,  —  as  we  less  confidently 
may,  —  that  the  saving  in  question  will  be  invested  in  social 
equipment,  we  have  still  to  seek  the  fundamental  principle  in  the 
case. 

Further  productive  equipment  is  worth  while  only  as  a  means  for 
increased  production.  And  further  production  is  worth  while  only 
as  a  means  to  increased  consumption.  A  larger  productiveness  in 
order  to  be  able  to  save  more,  in  order  then  to  have  a  still  larger 
product  out  of  which  in  turn  to  save  still  more,  is  a  circuity  of 


308  THE  ECONOMICS  OF  ENTERPRISE 

nonsense.  Somcwhen  and  somewhere  there  must  arrive  an  in- 
crease in  consumption,  else  the  saving  and  the  capitaHzation  are 
purposeless,  fruitless,  and  senseless.  The  point  at  which  saving 
should  stop  is  the  point  at  which  the  present  product,  in  view  of 
present  need,  rationallj^  outranks  future  jiroduct  for  future  need. 
The  expansion  of  ])roduct  is,  then,  justified  by  and  limited  by 
the  expansion  of  the  disjiosition  to  consumption.  The  standard  of 
consumption  must  keej)  pace  with  the  power  of  production,  or  there 
is  no  advantage  in  the  increased  power. 

But  the  question  whether  standards  of  consumption  do  commonly 
keep  pace  \vith  productive  power  so  that,  commonly,  no  surplus  pro- 
ductive equipment  comes  to  exist,  and  the  question  whether  stand- 
ards of  consumption  nmst  commonly  thus  keep  pace,  are  distinct 
and  separate  questions.  To  the  present  writer  it  appears  to  be  true 
that,  excepting  in  times  of  post-crisis  depression,  the  standards  of 
consumption  do  now,  in  most  modern  societies,  manifest  the  req- 
uisite power  of  expansion,  but  that  there  is  no  theoretical  necessity  for 
this ;  and  it  appears  equally  clear  that  in  post-panic  times  there  is  a 
distinct  and  disastrous  restriction  of  consumption,  with  the  result 
(1)  that  much  equipment  is  temporarily  a  suq^lus,  and  (2)  that  in 
some  measure  there  takes  place  in  industrial  processes  a  displace- 
ment of  labor  by  capital  goods. 

And  it  appears  to  be  true  that  the  very  fact  that,  through  develop- 
ing technique  and  increasing  equipment,  a  liigh  per-capita  produc- 
tivity obtains,  with  a  large  margin  of  average  individual  income 
over  imperative  individual  need,  explains  how  it  may  occur  and  does 
often  occur  that  the  volume  of  consumption  varies,  and  that,  through 
sharp  restriction  of  consumption,  industry  is  subjected  to  the  pe- 
riodic reverses  and  to  the  periodic  wastes,  insolvencies,  and  starva- 
tions which  bad  times  connote. 

We  seem,  then,  to  have  come  safely  thus  far:  that,  from  the 
social  point  of  view,  saving  should  neither  go  to  the  extent  of  sub- 
tracting from  present  consumption  more  in  utility  than  is  added 
by  the  later  increase  of  output,  nor  so  far  as  to  increase  the  later 
product  to  the  extent  that  the  later  consuming  disposition  will  not 
absorb  it ;  the  limits  of  rational  savings  are,  then,  set  by  the 
prospective  elasticity  of  consumption. 

But  now,  precisely  where,  if  anywhere,  does  this  leave  us  with 
regard  to  the  problem  of  luxurious  consumption  for  those  times  when 
the  general  attitude  is  one  of  overabstinence,  —  of  overemphasis, 
that  is,  upon  future  consumption  as  against  present  consumption? 

If  in  prosperous  times  the  consumption  of  the  rich  displaces, 


MONEY,  CREDIT,  AND  BANKING  309 

in  the  main,  only  their  own  later  consumption,  it  must  be  still 
clearer  that  any  expansion  of  consumption  in  times  of  depression 
cannot  be  at  the  expense  of  the  consumption  of  others.  And  obviously, 
if  the  luxury  of  the  rich  employs  productive  energies  that  other- 
wise would  not  function,  such  harm,  if  any,  as  can  result  to  others 
must  be  found  in  the  direction  of  influences  peculiar  not  to  luxurious, 
but  to  ostentatious  consumption — that  is  to  say,  not  in  the  direction 
of  any  influence  to  restrict  the  absolute  size  of  the  incomes  of  others, 
but  only  the  significance  of  those  incomes.  And  if,  in  times  like 
these,  charity  would  be  in  any  aspect  justifiable,  these  luxurious 
expenditures  have  some  obvious  advantages  over  charity. 

But  what  in  such  case  are  the  economic  effects  of  charity? 

People  who  can  find  no  work  to  do  live  somehow  out  of  the  actual 
product  of  industry,  whether  by  the  using-up  of  their  own  saved 
purchasing  power,  or  by  charity,  or  by  loan.  If  we  may  assume 
that,  through  offered  charity,  their  consumption  is  increased,  and 
yet  not  at  the  expense  of  the  consumption  of  others,  but  only  with 
the  result  that  more  goods  have  been  caused  to  be  produced,  it 
would  appear  to  be  true  that  the  charity  has  meant  added  consump- 
tion for  the  recipients  and  added  employment  for  others ;  and  if, 
with  their  larger  income,  these  others  should  be  minded  to  increase 
their  present  rate  of  consumption,  this  industrial  stimulus  would  be 
passed  forward  one  degree. 

The  case  would,  then,  stand  as  follows :  by  means  of  the  sub- 
stituted consumption  of  the  recipients,  the  donors'  existing  claims 
against  the  products  of  others  have  been  collected  in  the  present  and 
canceled,  instead  of  being  postponed  for  collection  and  cancellation 
to  the  future ;  and  the  collection  has  taken  place  at  a  time  when 
society  has  been  able  to  achieve  the  cancellation  through  the  em- 
ployment of  productive  energies  that  otherwise  would  have  gone  to 
waste. 

This  argument,  if  valid  —  which  is  doubtful  enough  —  means 
much  for  the  methods  and  the  times  of  the  carrying  forward  of 
pubHc  work.  But  even  without  the  support  of  this  particular  argu- 
ment, it  should  be  fairly  obvious  that  public  improvements  ought 
to  be  undertaken  in  times  only  of  slack  employment,  and  ought  to 
be  paid  for  in  times  of  prosperity,  rather  than,  as  in  present  practice, 
carried  on  in  prosperous  times  and  on  terms  of  displaced  production, 
and  paid  for  in  time  of  depression. 

But  what  does  the  argument  imply  for  the  social  advantage  of 
such  saving  as  does  not  express  itself  in  the  increase  of  the  productive 


310  THE  ECONOMICS  OF  ENTERPRISE 

equipment  of  society,  but  instead,  flows  into  consumption  loans  or 
goes  to  finance  fiscal  deficits?  Here  nothing  but  condemnation  is 
possible.  Any  private  investment  which,  for  any  considerable 
period  of  time,  takes  toll  from  social  product  by  other  title  than  of 
equivalent  addition  to  that  product  is  a  socially  disastrous  thing. 
No  matter  what  personal  or  moral  justification  there  may  seem  to 
be,  and  as  between  man  and  man  may  really  be,  the  case  is,  in  last 
analysis,  nothing  but  serfdom  on  the  one  side,  and  parasitism  on 
the  other. 

The  Quantity  Theory  of  Money. 

The  quantity  theory  of  money  values  —  the  theory  that 
asserts  that  the  general  level  of  the  exchange  powers  of  money 
depends  upon  the  quantity  of  it,  or  that  changes  in  the  quantity 
of  it  must  bring  proportional  changes  in  general  prices  — 
would  apply  especially  ill  —  were  any  one  disposed  to  apply 
it  —  to  the  early  history  of  any  commodity,  e.g.,  gold,  as  money, 
and  in  the  time  of  the  very  beginning  of  the  slow  and  gradual 
process  of  selective  emphasis.  The  quantity  of  gold  must  then,  as 
now,  have  had  some  bearing  on  its  exchange  relations,  its  values. 
In  this  sense  the  quantity  theory  has  no  deniers.  So,  also,  has  the 
quantit}'^  of  iron,  or  tea,  or  wheat,  or  bread,  or  cotton  cloth,  some 
bearing  on  the  market  values.  There  is  nothing  in  this  fact  peculiar 
to  money.  But  the  quantity,  say  of  gold,  in  use  as  money  at  that 
verj'-  early  time  could  have  had  little  bearing  on  its  values  at  that 
time.  There  was  no  occasion  for  one  value  theory  for  gold  and 
another  for  corn  or  cattle. 

It  is  quite  certain,  also,  that  the  present  extended  employment  of 
gold  as  money  (taking  gold  as  a  typical  money  and  assuming  it  for 
the  time  being  as  the  sole  medium  of  exchange)  must  have  a  great 
influence  upon  the  present  exchange  values  of  gold. 

So  far,  then,  the  theory  of  price  when  gold  is  money  does  not  ap- 
pear to  diverge  from  the  theory  of  the  price  of  gold  bullion  when 
gold  is  not  used  as  money.  Every  widening  of  the  field  of  use  for  any 
good  affects  the  demand  for  it  and  the  exchange  relations  of  it  to 
other  goods.  So  far  the  quantity  theory  of  the  purchasing 
powers  of  money  can  arouse,  and  has  in  the  past  aroused,  no 
opposition.  Gold  as  money  is  a  commodity  among  other  com- 
modities. If,  then,  there  is  force  in  the  quantity  theory  of  money, 
it  must  be  true  that  the  use  of  a  commodity  as  money  sub- 
jects that  commodity  to  influences  so  peculiar  as  clearly  to  distin- 
guish it  from  other  and  ordinary  commodities.     Is  gold,  as  the 


MONEY,   CREDIT,  AND  BANKING  311 

money  commodity,  more  than  a  mere  commodity,  differing,  be- 
cause it  is  money,  from  gold  or  any  other  commodity  employed 
exclusively  in  non-monetary  uses? 

But  what,  so  far  as  at  present  carried,  has  the  analysis  to  say  for 
the  merits  of  the  quantity  theory  of  money?  The  critics  of  the 
theory  place  their  main  emphasis  upon  two  objections:  (1)  that 
goods  do  not  and  cannot,  as  mere  goods  —  as  pounds  or  yards  or 
bushels  of  commodity  —  function  as  demand  for  money ;  it  is  only 
as  a  good  at  a  price  that  any  commodity  requires  money  for  its 
transfer.  The  quantity  theory  assumes,  therefore,  it  is  argued,  that 
price  relations  are  already  established,  as  the  basis  on  which  it 
explains  the  prices  — ■  proceeds,  that  is  to  say,  to  explain  price  rela- 
tions upon  the  basis  of  assuming  the  very  price  relations  that  are  to 
be  explained.  Karl  Marx,  for  example,  says :  "  The  sphere  of 
circulation  has  an  opening  through  which  gold  .  .  .  enters  into  it  as 
a  commodity  with  a  given  value  :  hence,  when  money  enters  on  its 
function  ...  its  value  is  already  determined."  ^ 

And  so  Laughlin :  "  The  difference  in  theory  centers  about  the 
time  and  the  manner  of  the  evaluation  process  between  goods  and 
gold.  .  .  .  The  evaluation  goes  on  antecedent  to  the  exchange 
operation,  since  the  exchange  cannot,  philosophically  or  practically, 
take  place  until  the  rate  of  exchange  has  been  settled."  ^ 

But,  in  point  of  fact,  the  entire  argument  of  the  opponents  of  the 
quantity  theory  proceeds  upon  an  assumption  which  may  be  ac- 
cepted for  the  purposes  of  the  immediate  issue  —  viz.  that  the  ex- 
change relations  of  gold  to  other  goods  must  be  explained  upon  the 
same  basis  as  the  exchange  relations  of  copper  or  of  bananas  to  other 
goods.  The  foregoing  criticism  is,  therefore,  not  well  taken  :  under 
the  present  issue  the  problem  of  the  quantity  theorist  is  not  to  ex- 
plain how  gold  Originally  established  itself  in  exchange  relations 
with  other  goods,  any  more  than  to  explain  the  early  history  of  the 
price  of  copper  or  of  bananas.  His  present  task  is  to  explain  how  a 
change  in  the  present  supply  of  money  —  gold  being  taken  as  the 
sole  money  —  must  affect  its  exchange  relations  to  all  the  other 
goods  against  which  it  exchanges.  He  needs  to  establish  merely 
that  if  there  be,  for  example,  twice  as  much  gold  money  in  the  aggre- 
gate to  be  distributed  among  all  these  different  exchanges  of  gold 
against  goods,  (1)  the  exchange  relations  will  be  modified,  and  (2) 
modified  equally,  and  (3)  that  the  fall  in  gold  will  be  exactly  one  half, 

'  Marx,  Capital,  Morse  and  Aveling  translation,  Part  I,  Chap. 
Ill,  p.  92. 

^  J.  L.  Laughlin,  Principles  of  Money,  p.  362. 


312  Till':   I'TOXOMICS  OF  ENTERPRISE 

i.e.,  prices  will  doublo.  Neither  for  the  quantity  theorist  nor  for  any 
one  else  is  ilisciission  possible  of  the  effects  of  changed  conditions 
upon  i^rices  unless  upon  the  assumption  of  prices  to  begin  with. 
The  etfect  of  more  money  upon  the  prices  of  copper  or  of  hats  —  and 
some  effect  is  not  denied  —  assumes  existing  prices  for  the  copper  or 
the  hats.  Still  other  prices,  indeed,  have  also  to  be  assumed. 
How  much  money  will  be  offered  at  any  time  for  copper  must  de- 
pend in  large  part  upon  how  far  money  will  go  in  the  buying  of  other 
things.  Most  i)rice  theory  is,  in  fact,  as  we  have  seen,  merely  a 
schematic  severing  of  the  sup])ly  of  one  commodity,  and  of  the  money 
demand  for  it,  from  tlie  prices  of  other  commodities.  Thus  the 
entire  demand  and  sup])ly  analysis  for  any  commodity  will  go  to 
pieces  under  the  Spartan  rcciuirements  of  critics  like  these.  And 
even  were  all  price  investigation  to  become  historical,  it  must  begin 
somewhere ;  and  each  step  of  it  must  take  a  given  price  situation  as 
its  starting  point.  The  process  will  present  itself  as  a  long  series  of 
small  incremental  changes.  But  this  is  precisely  the  method  of  the 
analysis  under  criticism  by  Laughlin  —  a  method  which  both  the 
advocates  and  the  assailants  of  the  quantity  theory  are  none  the  less 
compelled  to  accept;  always  the  problem  is  to  trace  out,  in  a 
given  situation,  the  changes  in  some  things  that  will  have  to  attend 
certain  changes  in  other  things. 

But  take  the  difficulty  at  its  worst :  Suppose  that  on  either  side  of 
the  river  there  are  goods  imperatively  calhng  for  transfer  to  the 
other  side  for  exchange  against  goods  there,  and  that  there  are  only 
a  fixed  number  of  boats  wdth  which  to  do  the  transporting  —  just 
boats,  not  valuable  boats :  Will  they  not  take  on  value  ?  And  if 
the  carrjdng  power  of  the  boats  is  dependent  upon  the  degree  of 
exchange  power  that  they  take  on,  will  they  not,  through  the  pres- 
sure of  the  competitive  bidding  for  them,  take  on  just  the  degrees  of 
exchange  power  in  all  their  different  exchange  relations  that  will 
enable  them  to  do  the  imperatively  necessary  thing? 

The  second  point  of  attack  presents  more  serious  difficulties  for 
the  quantity  theory  as  it  is  commonly  formulated.  When  gold  had 
not  yet  come  to  be  specialized  to  the  money  function,  the  supply  of  it 
had  clearly  something  to  do  with  the  values  of  it.  And  so  now  the 
quantity  of  any  ordinary  commodity  has  something  to  do  with  the 
values  of  that  commodity  now.  Likewise  the  quantity  of  gold  as  at 
present  employed  must  have  something  to  do  with  the  present 
exchange  relations  of  gold.  All  this  the  critics  of  the  quantity  theory 
freely  admit,  as  indeed  they  are  bound  to  do,  since  it  is  their  funda- 
mental doctrine  —  albeit  an  incorrect  doctrine  —  that  gold,  whether 


MONEY,  CREDIT,  AND  BANKING  313 

used  as  money  or  not,  is  a  commodity  whose  exchange  relations  are 
to  be  fully  explained  under  the  principles  valid  for  commodities  in 
general.  Thus,  this  second  objection  denies  that  goods  exchange  in 
one  great  total  and  aggregate  against  money — gold — as  a  total  and 
an  aggregate,  any  more  than  goods  in  general  exchange  against  copper 
or  wheat  or  iron  as  an  aggregate.  No  such  great  exchange  of  money 
for  goods  —  these  critics  assert  —  ever  takes  place,  but  only  an  in- 
definite number  of  separate  exchanges,  gold  here  against  copper, 
there  against  wheat,  and  so  on  indefinitely.  Each  of  these  exchanges 
is  a  separate  transaction  arrived  at  as  a  separate  adjustment  of  gold 
to  the  particular  commodity  in  question.  To  conceive  of  the  pro- 
cess as  one  great  exchange  of  commodities  for  money  is  a  social- 
organism  interpretation  of  the  facts,  or  some  other  fabulous  mis- 
interpretation. The  general  level  of  prices  —  the  argument  runs  — 
is  merely  a  way  of  summarizing  or  of  averaging  the  results  of  all  these 
different  and  separate  adjustments.  Thus  Marx,  having  again 
denounced  "  the  absurd  hypothesis  that  commodities  are  without  a 
price  and  money  gold  without  a  value  when  they  first  enter  into 
circulation,"  proceeds  to  deny  "  that  once  in  the  circulation,  an 
aliquot  part  of  the  medley  of  commodities  is  exchanged  for  an 
aliquot  part  of  the  heap  of  precious  metals.  .  .  .  How  use  values 
which  are  incommensurable  with  regard  to  each  other  are  to  be 
exchanged,  en  masse,  for  the  total  sum  of  gold  and  silver  in  a  society, 
is  quite  incomprehensible."  ^ 

And  so  Laughhn : 

"  The  principles  which  fundamentally  govern  price  .  .  .  avoid  all 
necessity  of  comparing  the  money  work  with  the  media  by  which 
that  work  is  necessarily  accomplished."  ^ 

"  A  general  level  of  prices  is  nothing,  but  an  average  made  up  of 
the  actual  quotations  of  single  articles."  ' 

"Are  farmers  .  .  .  really  influenced  in  fixing  the  prices  of  eggs  in 
gold  by  any  other  considerations  than  the  amount  of  money  work 
and  the  total  media  of  exchange?  "  * 

"A  general  demand  for  goods  arising  from  the  side  of  money  .  .  . 
is  only  a  phantom  demand,  a  figment  of  the  imagination.  ...  X  is 
exchanged  for  money ;  then  the  money  is  given  for  Y.  The  real 
exchange  is  of  X  for  Y."  * 

"  A  change  in  the  value  of  gold  ...  is  itself  a  change  in  price. 
It  seems  quite  unnecessary,  then,  to  go  through  a  subsequent  process 

1  Marx,  Capital,  Morse  and  Aveling  translation,  p.  99. 

^  Laughhn,  Principles  of  Money,  p.  229. 

3  Ibid.,  p.  316.  "  Ibid.,  p.  316.  ^  75^^.,  p.  324. 


314  THE  ECONOMICS  OF  ENTERPRISE 

of  comparing  the  media  of  exchange  with  the  mass  of  transactions 
in  order  to  procure  a  change  of  prices  or  to  find  the  cause."  ^ 

"  No  average  of  the  prices  of  a  number  of  commodities  can  be 
derived  in  any  other  way  than  by  combining  tlie  actual  (luotations  of 
single  commodities.  .  .  .  The  general  price  level  could  not  have 
been  arrived  at  by  a  comparison  of  all  the  money  work  with  all  the 
media  of  exchange.  .  .  .  We  must  seek  the  forces  affecting  the 
general  price  level  of  goods  among  those  already  analyzed  as  operat- 
ing on  particular  prices."  ^ 

"  The  quantity  of  gold  has  .  .  .  affected  prices  only  through  its 
influence  on  the  value  of  the  standard  of  prices,  and  not  through  its 
actual  presentation  as  a  medium  of  exchange  against  goods."  ^ 

No  answer  is  possible  to  this  criticism;  it  is  undeniable,  con- 
clusive, even  axiomatic.  If  the  doctrine  under  attack  is  the  quan- 
tity theory  at  its  best  —  if  this  is  a  fair  interpretation  of  its  essential 
position,  as  it  is  a  fair  interpretation  of  most  that  has  been  written 
in  its  advocacy  —  there  is  nothing  to  do  but  to  abandon  the  theory. 

The  fact  is,  however,  that  the  theorj^  does  not  rightly  rest  upon  the 
assumption  that  there  is  one  great  exchange  transaction  in  which  all 
the  exchange  relations  of  the  various  different  goods  to  money  are 
fixed;  the  general  price  situation  is  unquestionably  nothing  more 
than  "  an  average  made  up  of  the  separate  quotations  of  different 
articles."  Nor  can  tliis  level  be  modified  otherwase  than  through 
modifying  the  terais  of  the  separate  exchange  relations  between 
money  and  goods. 

Thus  either  or  both  of  the  foregoing  arguments  against  the 
quantity  theory  may  be  freely  accepted  without  the  slightest  inj  ury 
to  the  theory  in  any  careful  fonnulation.  Prices  must  move  up- 
ward with  an  increased  supply  of  money,  as  mere  intermediate, 
offered  for  goods.  These  prices  are  indissolubly  connected  and  are 
equally  affected  by  the  change  in  the  supply  of  the  offered  money. 
The  change  in  the  offered  supply  will  make  a  precisely  corresponding 
change  in  the  prices  of  the  goods  against  which  the  supply  is  offered. 

We  have  already  seen  that  most  of  the  fluctuations  in  prices  are 
due  to  changes  in  the  credit  situation.  The  commercial  crisis  is  a 
collapse  of  credit.  The  low  prices  of  the  post-panic  depression  are 
due  either  to  the  terror  or  to  the  industrial  havoc  wrought  by  the 
collapse.  Rising  prices  are  commonly  due  more  to  expanding  credit 
than  to  expanding  supphes  of  moneJ^  How,  then,  can  the  quantity 
theorist  account  for  credit  in  his  formulations?  Either  (1)  he  must 
resort  to  the  heroic  abstraction  of  conceiving  credit  as  a  constant 

1  Laughlin,  oy.  cit.,  p.  342.       ^  Ibid.,  pp.  352-3.       '  Ibid.,  p.  362. 


MONEY,   CREDIT,   AND  BANKING  315 

relative  to  money,  of  treating  it  as  one  of  the  "  other  things  assumed 
to  be  equal,"  or  (2)  he  must  reformulate  his  doctrine  so  as  to  assert 
that  prices  are  proportional  to  the  quantity  of  exchange  media 
offered  against  commodities.  Course  (1)  is  certainly  open  to  him, 
leaving  over,  however,  the  necessity  of  taking  full  account  of  the 
disturbances  attending  the  fact  that  credit  is  one  of  the  various 
things  that  actually  never  remain  equal.  Only  in  a  long  time  and 
general  average  is  it  safe  to  assert  that  credit,  as  built  upon  money 
reserves,  holds  a  fairly  constant  relation  to  the  volume  of  money. 
To  regard  credit  as  a  constant  is  doubtless  necessary  for  certain  pur- 
poses, since  only  by  the  method  of  logical  isolation  is  the  independent 
significance  of  the  money  changes  to  be  analyzed.  But  inasmuch  as 
the  long-time  and  gradual  changes  in  prices  are  of  small  practical 
importance,  while  the  short-time  disturbances  and  fluctuations  are 
of  paramount  seriousness,  the  method  of  isolation  can  directly 
interest  only  the  devotee  of  theoretical  long-time  analyses.  (2)  It 
is  equally  open  to  the  quantity  theorist  to  conceive  of  credit  as 
currency,  and  to  present  the  level  of  prices  of  any  one  time  as  deter- 
mined by  the  supply  of  currency  offered  for  the  various  goods  respec- 
tively, as  over  against  the  respective  supplies  of  goods.  The  differ- 
ent exchange  relations  must  still  be  separately  established  between 
goods  and  gold,  it  being  true  merely  that  the  use  of  credit  in  place  of 
gold  must  greatly  affect  the  exchange  values  of  gold.  In  those 
exchanges  in  which  gold  is  not  actually  used,  a  substitute,  payable  in 
gold  or  valued  in  gold,  is  the  quid-pro-quo  in  the  exchange.  Thus 
gold  becomes  so  much  the  more  plenty  for  the  remaining  exchanges 
in  which  it  is  actually  used,  and  the  values  of  it  and  of  all  the  substi- 
tutes interchangeable  with  it  come  to  be  fixed  in  those  transactions  in 
which  gold  is  the  actual  medium.  Thus  it  need  not  greatly  matter 
to  the  view  under  consideration  whether  credit  be  conceived  as 
adding  to  the  total  supply  of  media  or  as  diminishing  the  volume  of 
transactions  calling  for  the  use  of  the  actual  gold  and  functioning 
therefore  as  demand  for  it  in  its  service  as  medium.  In  either  of 
these  views,  however,  the  necessity  or  reserves  must  be  considered. 
Credit,  as  an  addition  to  the  total  supply  of  media,  must  stand  as 
merely  a  balance  between  the  total  credit  and  the  reserves  necessary 
in  support  of  it.  Or  if  credit  be  viewed  as  an  economy  of  money, 
allowance  must  similarly  be  made  for  the  amount  of  money  required 
in  the  reserve  function. 

Taking,  then,  the  products  to  be  exchanged  as  constant,  and 
taking  the  volume  of  credit  to  be  constant  in  its  ratio  to  the  volume 
of  money  on  which  it  is  based,  the  level  of  prices  must  be  in  direct 
ratio  to  the  volume  of  money  offered  against  goods.    If,  however, 


316  THE   F.COXOMICS  OF  ENTERPRISE 

credit  is  not  conceived  as  a  constant  relatively  to  money,  the  level  of 
prices  must  stand  in  direct  ratio  to  the  volume  of  money  and  of 
credit  offered  against  goods. 

Wc  conclude,  then,  that,  as  a  long-time  influence,  an  increased 
quantity  of  money  must  lower  its  exchange  jjower  —  the  exchange 
power  of  the  standard — in  its  various  exchange  relations,  not  as  an 
increase  relative  merely  to  the  money  use,  but  relative  to  its  entire 
use  as  money  and  as  commodity.  Gold  values  are  due  on  the  demand 
side  to  both  of  these  demands,  and  the  total  supply  is  distributed 
between  these  demands,  precisely  as  is  the  total  supply  between  the 
ditTerent  countries,  according  to  the  relative  strengths  of  the  de- 
mands. The  nioney  demand,  as  an  especially  imperative  and  in- 
elastic demand,  must  absorb,  as  against  the  commodity  demand, 
enough  of  the  gold  at  any  level  of  its  exchange  powers  to  mediate  the 
volume  of  exchanges  dependent  upon  it.  It  is  merely  a  crude  ren- 
dering of  the  quantity  theory  that  "  bases  prices  upon  the  quantity 
of  the  gold  [money]  actually  passed  from  hand  to  hand  as  medium 
of  exchange."  ^  The  exchange  values  of  the  money  unit  are  not 
derived  from  the  commodity  market  nor  are  they  prescribed  to  the 
commodity  market.  Both  demands  concur  in  affecting  the  ex- 
change values  of  the  commodity  which  is  used  for  both  purposes. 
So  long  as  no  barrier  exists  between  the  two  uses,  no  item  of  gold 
can  remain  in  use  as  money,  if  it  has  as  bullion  a  higher  exchange 
power  in  any  other  use  than  it  has  as  money.  The  money  use  will, 
on  the  other  hand,  absorb  every  ounce  of  gold  to  which  it  can  offer 
the  better  market. 

But  there  are  certain  phenomena  of  prices  which  the  quantity 
theory  —  in  any  usual  formulation  —  does  not  explain,  and  which 
the  opponents  of  the  theory  cite  insistently  in  refutation  —  the 
while  themselves  keeping  safely  distant  from  any  attempt  at  ex- 
planation. 

No  matter  what  the  relation  of  expanding  credit  to  prices  pre- 
cisely is  —  and  in  this  regard  the  divergences  of  doctrine  are  not 
serious  —  it  is  clear  that  the  motives  prompting  both  the  application 
for  credit  and  the  granting  of  it  are  various.  It  is  only  at  fairly 
distant  intervals  that  the  banks  are  seriously  limited  in  their  credit 
extensions  by  anj^  shortage  of  reserves :  and  even  at  these  times,  the 
limitation  is  commonly  due  to  the  acute  but  temporary  stringency 
attending  the  seasonal  movement  of  crops  or  to  the  recurrent  dates 
of  heavy  financial  settlements.    Loans,  therefore,  may,  it  is  true, 

^  Laughlin,  op.  cit.,  p.  280. 


MONEY,   CREDIT,  AND  BANKING  317 

be  restricted  by  the  inadequacy  of  reserves;  but  the  fact  is  that 
they  are  not  commonly  so  restricted. 

Why,  then,  with  reserves  to  spare,  do  not  the  banks  extend  their 
credit  activities?  Not  rarely  because  business  men  are  not  asking 
for  the  larger  credit.  Or,  again,  the  banker  may  regard  the  direct 
risks  as  ovcrgreat.  Or,  still  again,  he  may  hesitate  because  of  un- 
known ])ossibilities  of  reserve  pressure  or  of  disturbed  credit  in  the 
future.  Recalling  that  new  supplies  of  gold  go  mostly  to  the  mints, 
and  move  thence  to  the  banks  as  deposits,  it  must  commonly  be  true 
that  the  new  gold  has  no  effect  to  influence  the  amount  of  credit  in 
circulation,  and  no  direct  effect  to  change  the  amount  of  gold  in  cir- 
culation.    Some  effect  in  the  latter  regard  it  undoubtedly  does  have 

—  but  by  methods  for  which  the  quantity  theory  makes  no  provision 

—  methods,  indeed,  which  are  not  easy  to  make  consistent  with  it. 
At  these  times  of  plethoric  reserves,  the  change  in  general  prices  is 
initiated  in  the  non-monetary  market  for  gold.  With  the  greater 
supply  of  it  both  for  money  and  for  commodity  uses,  more  of  it  is 
used  for  commodity  purposes,  at  falling  exchange  ratios  against 
other  things.  As  gold  falls  in  the  commodity  market,  it  has  also  to 
fall  as  money ;  prices  go  up.  With  these  higher  prices  and  the  larger 
need  for  a  circulating  medium,  credits  commonly  expand,  and  at  the 
same  time  some  gold  tends  to  leave  the  banks  for  cash  exchanges. 
Thus,  with  some  loss  of  gold  from  the  bank  holdings  and  with  some 
increased  need  for  gold  to  go  with  larger  credits,  the  balance  of  idle 
reserves  is  narrowed ;  the  quantity  of  media  is  changed  as  a  result — 
not  as  a  cause  —  of  the  changed  level  of  prices. 

There  is,  then,  no  fixed  and  regular  ratio  between  the  volume  of 
gold  in  the  aggregate  and  the  volume  of  gold  in  circulation  as  money, 
either  directly  or  as  reserves  for  credit.  Nor  is  there  any  uniformity 
of  ratio  between  the  volume  of  gold  in  the  banks  and  the  volume  of 
credit  reared  upon  it.  It  is,  however,  as  we  have  seen,  fair  to  regard 
these  as  short-time  divergences  from  the  norm.  In  the  long  run  and 
in  the  broad  average,  the  volume  of  credit  depends  on  the  volume  of 
money  —  reflects  it  —  shadows  it.     But  it  is  in  the  very  long  run. 

This  same  short-run  lack  of  correspondence  is  illustrated  with 
even  greater  emphasis  in  the  phenomena  of  crises  and  of  post-crisis 
depression.  It  is,  indeed,  at  this  point  that  the  critics  of  the 
quantity  theory  have  made  their  final  and  impregnable  stand  —  but 
only  as  a  short-run  appeal  to  the  other  things  that  are  not  equal. 

The  crumbling  of  prices  in  time  of  panic  is  explained  by  the 
partisans  of  the  quantity  theory  as  a  contraction  of  credit ;  thus  a 
contraction  of  the  total  of  the  circulating  medium;    and  thus  a 


318  THE  ECONOMICS  OF  ENTERPRISE 

fall  in  prices.  No  difficulty  is  commonly  felt  with  the  fact  that  the 
prices  of  some  things  are  falling  with  especial  rapiditj'.  Allowance 
is,  however,  now  and  then  made  for  the  increased  demand  centering 
upon  what  is  left  of  the  circulating  medium  by  reason  of  old  credit 
relations  that  are  now  i)ushing  for  liquidation. 

But  the  difficulty  with  the  ex])lanation  is  that  it  only  partially 
explains.  Not  only  this,  but  the  facts  arc  perhaps  more  easily 
fitted  into  the  contrasted  emphasis,  \iz.  that  money  in  each  of  its 
exchange  relations  is  coming  to  buy  more  goods  —  goods  to  buy 
less  money. 

The  truth  is,  however,  that  other  and  important  causal  forces  are 
at  work  in  time  of  panic. 

The  tumbling  of  prices  in  the  panic  is  in  large  part  due  to  the  fact 
that  the  holders  either  of  money  or  of  deposit  credit  will  not  buy 
with  it.  Phj'sicall}^  the  money  is  there  —  as  quantity,  as  concrete 
tiling ;  psychologically,  as  purchasing  power,  it  has  vanished.  So, 
also,  the  deposit  credits  exist,  but  they  have  ceased  to  exist  as  de- 
mand for  products.  They  are  merely  hoarded,  postponed  purchas- 
ing power.  As  present  circulating  medium,  as  present  demand  for 
anything,  they  are  not. 

Thus  there  are  more  goods  being  offered  against  currency — not  all 
of  them  at  once,  truly,  as  one  transaction  —  than  are  possible  of 
sale  at  the  immediately  preceding  level  of  prices.  So  prices  fall. 
But  there  is  more  in  the  case  than  the  mere  scared  or  speculative 
retirement  of  the  circulating  medium.  There  is  also  an  increase  in 
the  volume  of  commodities  pressing  for  sale  at  the  existing  prices 
—  many  of  them,  indeed,  for  sale  at  practically  any  price 
above  nothing.  There  is,  in  truth,  not  only  less  currency,  but  also 
more  goods.  A  panic  is  equally  a  scared  scramble  to  get  gold  —  or 
tilings  interchangeable  with  it  —  and  a  scared  tenacity  in  holding 
it,  —  more  generous  offers  of  goods  against  it  and  higher  refusal 
terms  for  it. 

There  is,  then,  a  change  both  in  the  demand  disposition  to  offer 
goods  for  money  and  in  the  supply  disposition  to  offer  money  for 
goods.  Holders  of  goods  fear  financial  pressure  or  a  further  fall 
in  the  prices  of  goods,  and  so  push  to  sell :  holders  of  money  may  be 
apprehensive  of  possible  demands  of  creditors,  or  may  be  looking 
for  further  advantage  as  purchasers  with  further  putting  off  of 
buj'ing ;  or  they  may  have  become  convinced  of  the  wisdom  of  a 
fijial  withdrawal  from  all  this  up-and-down  of  things  with  its  menace 
of  loss,  and  so  are  waiting  to  lend  out  their  funds  in  some  safe  and 
long-time  placement  —  or  are  going  to  do  some  one  or  other  unfixed 


MONEY,   CREDIT,   AND  BANKING  319 

thing  a  year  hence,  when  they  shall  have  recovered  from  their  fright. 
Temporarily,  then,  the  emphasis  is  on  currency,  the  intermediate  of 
exchange,  but  not  on  currency  as  intermediate  between  present 
goods  and  present  goods  —  not  on  currency  as  present  purchasing 
power,  but  on  currency  as  deferred  purchasing  power,  on  currency 
for  future  purchases  rather  than  as  demand  for  present  goods. 
True,  the  quantity  of  money  has  not  changed ;  nor  has  the  aggre- 
gate mass  of  goods  become  greater.  But  the  offered  currency  is  less 
and  the  offered  goods  are  more. 

The  truth  is,  then,  that  there  are  changes  in  price  levels  that  are 
irrelevant  to  changes  in  the  aggregate  volume  of  goods  produced,  and 
irrelevant,  also,  to  changes  in  the  volume  of  money,  and  which  are  not 
to  be  accounted  for  by  changes  in  the  volume  of  credit  available  as 
purchasing  power,  but  are  solely  explicable  as  changes  in  the  attitude 
of  the  holders  of  goods  toward  purchasing  power  and  of  the  holders  of 
purchasing  power  toward  goods.  Times  of  panic  involve  the  in- 
fluence of  strong,  though  unusual,  psychological  movements,  wherein 
the  medium  of  exchange  is  itself  the  subject  of  a  new  emphasis  and 
of  speculative  activities. 

And  the  phenomena  of  the  post-panic  situation  also,  the  lethargy 
and  stagnation  of  the  dull-time  years,  still  further  illustrate  a 
psychology  peculiar  to  monetary  affairs  —  a  psychology  to  which 
the  quantity  theory  affords  no  key.  The  bear  movement  in  goods 
continues  and  may  even  be  emphasized.  The  prevailing  disposition 
is  to  get  hold  of  suspended  purchasing  power  and  to  keep  hold  of  it. 
Despite  an  increasing  plethora  of  reserves  in  the  banks,  and  despite 
falling  rates  of  interest  for  those  borrowers  whose  credit  is  good 
enough  to  enable  them  to  borrow  at  all,  prices  remain  low.  The 
diminished  volume  of  exchanges  and  the  generous  reserves  are  to- 
gether inadequate  to  bring  about  an  upward  movement  in  prices,  or 
appreciably  to  stimulate  purchases  at  the  prevailing  low  general 
prices.  It  remains  difficult  to  find  a  market  for  products,  simply 
because  each  producer  is  attempting  a  feat  which  must  in  the  aver- 
age be  an  impossibility  —  the  selling  of  goods  to  others  without  a 
corresponding  buying  from  others.  Goods  refuse  to  exchange 
through  money  against  goods,  but  only  against  money,  as  the  pur- 
chasing power  with  which  to  control  future  goods  when  the  pur- 
chasing disposition  shall  reestablish  itself.  In  other  words,  the 
prevailing  emphasis  is  upon  money,  not  as  intermediate  for  present 
purposes,  but  as  a  commodity  to  be  kept — regarding  money  not  so 
much  as  an  intermediate  in  trade  as  an  end  in  itself,  or,  more  accu- 
rately, not  so  much  with  reference  to  its  chief  function  of  mediating 


320  THE  ECONOMICS  OF  ENTERPRISE 

exchanges  of  present  goods  as  to  its  usually  suhortlinato  fuiu'liou  of 
mediating  exchanges  between  present  goods  and  future  goods. 
For  all  jiresent  purposes  of  exchange  relations  and  of  pric(>s,  the 
psychology  of  the  time  stresses  not  the  goods  to  be  exchangcnl 
through  the  intermediate  commodity,  but  the  commodity  itself. 
The  halfway  house  becomes  a  house  of  stopping.  Th(>re  sets  in  an 
abnormally  developed  emphasis  upon  money  or  credit  as  deferred 
purchasing  power  rather  than  as  present  purchasing  power — on 
money  for  future  purchases  rather  than  as  demand  for  present  goods. 
Or  to  put  the  case  in  still  another  way :  the  situation  is  one  of 
withdrawal  of  a  large  part  of  the  monej^  supply  at  the  existing  level 
of  prices ;  it  is  a  change  of  the  entire  demand  schedule  of  money 
against  goods  —  offer  jirices  and  reservation  prices  both  being  in- 
cluded. If  the  terminology  of  the  case  is  to  be  fitted  —  so  far  as 
may  be  —  to  the  needs  of  the  quantity-theory  analysis,  this  dimin- 
ished disposition  on  the  part  of  holders  of  money  to  let  it  go  will  have 
to  be  interpreted  into  a  diminution  in  the  supply  of  money. 

And  a  similar  necessity  will  face  the  quantity  theorist  on  the 
supply  side  of  the  market  analysis :  he  will  have  to  interpret  an  in- 
creased pressure  on  the  part  of  holders  of  goods  to  sell  them  into  a 
radical  increase  in  the  supply  of  goods.  In  any  accurate  statement, 
however,  the  truth  of  the  case  would  run  about  as  follows :  In 
ordinary  times,  and  with  men  in  their  ordinary  minds,  only  a  small 
part  of  the  goods  that  thej^  have  are  for  sale,  or  if  for  sale,  are  not 
for  sale  at  what  an^ybodj^  would  think  of  giving.  The  goods  were 
bought  to  keep,  because  they  were  wanted  as  against  anytliing  else 
that  the  money  was  Ukely  to  buy.  The  very  reasons  that  have 
motivated  the  buying  of  the  goods  in  the  market  now  prohibit 
their  resale  in  the  market.  Thus  it  is  true  —  in  one  way  of  stating 
it  —  that  at  the  ordinary  established  level  of  prices  only  a  small 
part  of  the  total  volume  of  goods  is  seeking  exchange  through  the 
intermediate.  The  rest  of  the  goods  have  already  distributed 
themselves  into  their  permanent  abiding  places.  There  is  no  other 
place  in  which  they  so  well  belong  as  in  the  hands  of  the  men  who 
now  have  them.  If  they  are  to  be  rated  as  supply  at  all,  —  as  surely 
in  ultimate  theory  they  ought,  —  they  enter  into  the  respective 
supply  schedules  at  such  high  refusal  or  reservation  prices  as  to  have 
no  slightest  prospect  of  being  sold.  They  are  salable  at  a  price,  but 
find  no  takers  at  the  price ;  they  are  excluded  supply. 

But  with  changing  times  men's  minds  change.  Under  stress  of 
fright  or  under  pressure  of  financial  need,  or  at  some  speculative 
raid  or  speculative  funk,  there  may  come  a  radical  scaling  dov/n  of 
these  reservation  prices  as  well  as  of  the  offer  prices.     And  especially 


MONEY,  CREDIT,  AND  BANKING  321 

—  and  especially  disastrously — in  the  period  succeeding  a  panic,  is 
there  manifest  a  widespread  and  extreme  solicitude  for  the  needs  of 
the  future  as  against  the  present  —  a  mania  for  collecting  units 
of  purchasing  power  for  purposes  of  future  use  —  rainy-day  provi- 
sion run  mad. 

What  is  the  quantity  theorist  going  to  do  with  the  necessity  of 
fitting  the  short-time  and  especially  significant  perturbations  of 
things  into  his  long-time  categories  ?  If  he  is  to  succeed  in  making 
liis  formulas  fit  the  facts,  it  must  be  on  terms  of  reconstructing  his 
fundamental  value  categories,  and  therewith  of  reinterpreting  some 
portion  of  his  quantity-theory  doctrine.  The  summons  is,  indeed, 
peremptory  to  do  these  things.  Nor  are  they  at  all  impossible  of 
doing. 

Bimetallism. 

The  world's  stock  of  available  gold  for  both  monetary  and 
non-monetary  purposes  is  probably  from  ten  to  eleven  billions 
of  dollars.  Something  over  one  half  of  this  is  absorbed  by  the 
money  demand.  If,  indeed,  the  reserves  of  the  great  banking 
houses  of  Europe  and  the  reserves  of  the  numberless  small  banking 
houses  scattered  over  the  world  are  estimated  and  included,  probably 
something  upwards  of  65  per  cent  of  the  available  supply  of  gold  is 
devoted  to  monetary  uses.  In  the  United  States,  accordimg  to  the 
government  report  of  August  1,  1912,  47  per  cent  of  a  total  circula- 
tion of  3277  millions  of  dollars,  was  gold  either  as  coin  or  as  gold 
certificates.  The  total  of  gold  in  monetary  use  in  the  United  States, 
inclusive  of  the  treasury  holdings,  was  1833  millions. 

That  the  purchasing  power  of  gold  would  fall  sharply,  were  gold 
demonetized  the  world  over,  cannot  be  open  to  question.  Nor  more 
is  it  to  be  questioned  that  the  money  use  for  gold  has  greatly  con- 
tributed to  the  establishing  of  its  present  different  purchasing  powers. 

Equally  unquestionable  is  it  that  the  demonetization  of  gold  by 
any  one  country  would  work  its  quota  of  fall,  and  that  any  new 
adoption  of  gold  as  money  must  contribute  either  to  raise  its  pur- 
chasing powers  or  to  mitigate  a  fall  which  would  otherwise  occur. 
This  is  not  quantity-theory  doctrine,  but  monetary  doctrine  at 
large. 

Not  less  certain  is  it  that  the  series  of  silver  demonetizations  from 
1870  down  to  the  present  time  have  contributed  to  the  fall  of  silver 
in  terms  of  gold  and  to  the  falling  powers  of  exchange  of  silver  in 
terms  of  other  things.  And,  finally,  it  is  equally  clear  that  any 
partial  remonetization  of  silver  would  affect   its  market  position 


322  THE  ECONOMICS  OF  ENTERPRISE 

favorably,  and  that  its  general  n^monctization  would  sharply  raise 
its  commodity  values,  and  still  n\ore  sharply  its  exchange  power 
relative  to  gold.  The  especially  marked  effect  upon  the  exchange 
power  relative  to  gold  wouUl  be  due  to  the  fact  that  the  remone- 
tization  of  silver  would  in  itself  amount  to  some  degree  of  demone- 
tization of  gold. 

The  foregoing  is,  in  broad  lines,  an  account  of  what  is  known  as  the 
"  compensatory  action  "  between  gold  and  silver,  when  both  are 
freely  coined  at  any  fixed  ratio  —  whether  on  the  basis,  say,  that  a 
silver  dollar  shall  contain  sixt(^en  times  as  much  weight  of  silver  as 
the  gold  dollar  contains  of  gold,  the  ratio  of  16  to  1,  or  on  the  basis 
that  the  silver  dollar  contain  twenty-five  or  thirty  times  the  weight 
of  the  gold  dollar,  the  ratio  of  25  or  30  to  1. 

An  ounce  of  silver  is  actually  worth  -^j  of  an  ounce  of  gold.  If 
the  coinage  ratio  were  made  one  to  one,  an  ounce  of  silver  coining 
into  as  much  money  as  an  ounce  of  gold,  only  silver  would  be  coined. 
And  if,  on  the  other  hand,  the  coinage  ratio  of  silver  to  gold  were  50 
to  1,  no  silver  would  be  coined.  The  silver  so  coined  would  be  worth 
only  f-f  as  much  as  coin  as  it  was  worth  before  coining.  To  coin 
it  would  be  to  stamp  it  as  worth  less  than  its  actual  bullion  worth  — 
to  make  50  ounces  of  silver  exchange  against  one  ounce  of  gold  when, 
in  actual  fact,  35  ounces  of  silver  bullion  are  worth  one  ounce  of  gold 
bullion.     No  one  could  afford  to  coin  anything  but  gold. 

If,  however,  the  ratio  selected  were  not  widely  divergent  from  the 
actual  market  ratio  —  say  36  to  1  —  only  a  slight  change  in  this 
market  ratio  would  be  necessary  in  order  to  bring  silver  into 
monetary  use.  Nor  would  the  coinage  of  silver  necessarily  mean 
that  the  coinage  of  gold  had  stopped,  but  only  that  it  were  less  rapid. 
Silver  would  be  in  some  part  —  greater  or  less  —  usurping  the  place 
of  gold  in  furnishing  the  bullion  supplies  for  new  coinage.  But  no 
great  supply  of  silver  would  be  available  at  the  lately  reached  identity 
of  the  market  ratio  with  the  coinage  ratio.  It  might  be  true  merely 
that  gold  would  be  coined  less  than  if  silver  were  not  coined  at  all. 
In  any  case,  the  total  coinage  of  the  two  would  be  greater  than  if 
only  one  were  coined.  This  slow  and  gradual  coinage  of  silver 
would  mean,  therefore,  some  slight  tendency  toward  rising  prices 
—  or  prevention  of  fall  —  even  though  it  might  all  the  while  be  true 
that  the  reserves  of  the  banks  were  generously  ample.  But  note 
that  the  rise  in  prices  must  be  very  gradual  —  or  the  prevented  fall 
be  inconsiderable  —  not  merely  because  the  inflow  of  silver  would 
be  slight,  but  because,  concurrently  with  this  inflow  of  silver  and  its 
effect  upon  prices,  the  gold  inflow  must  be  in  some  degree  checked,  or 


MONEY,  CREDIT,  AND  BANKING  323 

even  an  outflow  set  up,  in  response  to  the  relatively  increasing  at- 
tractiveness of  the  outside  market. 

It  is  clear  that  so  far  as  gold  were  being  set  free  by  silver  from  the 
money  use,  this  must  be  on  terms  of  affecting  adversely  the  pur- 
chasing powers  of  gold  in  the  outside  markets  to  which  it  flows. 
And  so  far  as  silver  were  being  absorbed  by  the  money  use  in  place 
of  gold,  this  must  be  on  terms  not  only  of  affording  to  silver  a  wider 
market,  but  also  of  retarding  the  fall  which  must  otherwise  occur  in 
the  exchange  powers  of  silver  relatively  both  to  commodities  in 
general  and  to  gold.  Silver  could  come  to  be  coined  only  when  its 
exchange  ratio  against  gold  had  so  far  fallen  as  to  make  its  coinage 
possible.  Its  further  coinage  must  tend  to  hold  the  market  ratio  at 
the  level  of  the  coinage  ratio,  not  only  by  setting  an  end  to  the  fall 
of  silver  relatively  to  gold,  but  also  setting  up  a  fall  of  gold  —  or  of 
preventing  a  rise  which  would  otherwise  have  taken  place. 

In  tendency  the  new  coinage  of  silver  is,  then,  (1)  adverse  to  the 
purchasing  powers  of  the  money  unit,  (2)  adverse  to  the  purchas- 
ing powers  of  gold,  (3)  favorable  to  the  purchasing  powers  of  silver, 
(4)  conservative  of  the  exchange  ratio  of  the  metals  at  the  coinage 
ratio : 

(1)  The  coinage  of  silver  takes  place  at  a  net  increase  in  the 
number  of  money  units :  Therefore  the  purchasing  powers  of  the 
unit  cannot  be  as  high  as  if  no  silver  were  coined. 

(2)  The  money  unit  falling,  and  gold  being  still  employed  as 
money,  gold  must  also  fall  both  as  bullion  and  as  coin.  It  is,  indeed, 
solely  by  virtue  of  this  fall  that  larger  supplies  of  it  are  available  for 
commodity  purposes. 

(3)  The  fall  of  silver  relatively  to  gold  which  makes  possible  the 
coinage  of  silver  is  retarded  by  the  new  market  which  is  opened  up 
for  it. 

(4)  This  retardation  of  the  fall  of  silver  occurs  concurrently  with 
an  unfavorable  influence  upon  the  purchasing  powers  of  gold. 
Thus  the  fall  in  the  purchasing  powers  of  the  money  unit  takes 
place  side  by  side  with  a  tendency  favorable  to  the  values  of  silver 
and  unfavorable  to  the  values  of  gold. 

This  same  line  of  analysis  would  obviously  hold  were  silver  the 
original  standard  and  gold  the  metal  made  available  for  new  coinage. 
Nor  is  it  necessarily  true  that  the  inflowing  metal  must  bring  about 
a  fall  in  the  purchasing  powers  of  the  unit;  the  effect  might  be 
merely  to  mitigate  a  tendency  toward  rise.  The  analysis  is  valid 
merely  to  establish  the  different  directions  of  influence  attendant 
upon  the  joint  coinage  of  the  two  metals. 


324  THE  ECONOMICS  OF  ENTERPRISE 

We  arc  now  prepared  to  examine  the  osscniial  doctrine  in  the 
bimetallic  ])osition;  namely,  that  in  view  (1)  of  the  retardation  of 
the  tendency  of  the  new  metal  toward  fall  relatively  to  the  previ- 
ously existinji;  level  of  j^old,  (2)  of  the  adverse  influence  uiion  the  level 
of  gold,  (3)  of  the  fact  that  the  purchasing  i;)ower  of  the  money  unit 
of  either  metal  is  unfavorablj'  affected,  and  (4)  of  the  fact  that  in  the 
monetary  use  the  two  metals  are  equal  and  interchangeable  and 
are  moving  in  this  monetary  use  concurrently  in  their  level  of  pur- 
chasing powers,  —  the  two  metals  must  everywhere,  in  their  ex- 
change ratios  one  to  the  other,  maintain  the  ratio  fixed  for  coinage 
purposes,  so  long  as  neither  has  been  coined  in  sufficient  quantities 
as  entirely  to  displace  the  other  from  the  money  use. 

It  is  evident  that  if  the  free  coinage  of  the  two  metals  at  the 
assumed  ratio  were  attempted  by  any  one  country  alone,  some 
part  of  the  displaced  gold  would  flow  abroad  for  foreign  monetary 
uses,  and  some  part  be  set  free  for  the  world  commodity  market. 
In  such  case  gold  would  suffer  relatively  little  in  its  level  of  exchange 
power.  The  rise  of  prices  in  the  bimetallic  country  could  not  be 
very  appreciable  without  the  disappearance  of  all  the  gold  from  the 
monetary  use.  The  total  of  money  units  would  be  increased,  but 
not  greatly  increased,  so  long  as  gold  circulated  at  all,  since  the 
number  of  units  of  silver  inflow  could  not  greatly  exceed  the  number 
of  units  of  gold  outflow.  The  general  change  in  prices  attendant 
upon  the  process  of  displacement  would  be  relatively  slight  so  long 
as  any  gold  remained  in  circulation. 

If,  however,  the  joint  coinage  were  international  and  general  at 
the  assumed  ratio,  such  outflow  of  gold  as  took  place  must  be  solely 
into  commodity  uses.  The  adverse  influence  upon  the  purchasing 
powers  of  gold  would  be  more  marked  and  the  difficulty  of  main- 
taining the  actual  exchange  ratio  of  silver  to  gold  at  the  coinage 
ratio  would  be  much  less  serious.  In  either  case,  however,  it  is 
clear  that  the  outflow  of  gold  resulting  from  the  inflow  of  silver  can- 
not be  unit  for  unit.  With  the  lower  exchange  powers  of  the  money 
unit  more  units  are  required.  The  inflow  must  exceed  in  units  the 
outflow. 

With  the  world  half  bimetallic  and  half  silver  monometallic,  the 
difficulties  would  be  other,  but  not  greater,  in  holding  together  the 
exchange  parity  and  the  coinage  parity :  Assuming  still  that  the 
coinage  of  silver  were  to  take  place  only  when  the  fall  in  silver  had 
brought  its  market  ratio  up  to  the  coinage  ratio,  or  assuming  that 
the  coinage  ratio  did  not  appreciably  depart  from  the  existing 
market  ratio,  the  available  supply  of  silver  for  the  new  coinage 


MONEY,   CREDIT,  AND  BANKING  325 

would  be  small,  aiul  the  share  of  the  new  product  offering  itself  at  the 
mint  be  greatly  restricted  through  the  coinage  requirements  of  the 
silver  standard  countries.  The  coinage  of  silver  could,  then,  have 
no  great  significance  in  its  earlier  stages  either  for  good  or  ill.  In  the 
long  run,  however,  the  continued  and  perhaps  increasing  coinage  of 
it  might  equally  readily  either  bring  about  a  depreciation  of  the 
money  unit  or  prevent  an  appreciation.  Where,  then,  there  is  an 
evident  tendency  toward  the  appreciation  of  gold  as  money,  the 
concurrent  coinage  of  silver  must  somewhat  retard  or  prevent  or 
even  overbalance  the  trend  of  gold  toward  aiDpreciation.  And 
if  either  metal  used  alone  as  money  were  tending  toward  deprecia- 
tion, the  adoption  of  bimetallism  must  somewhat  accelerate  this 
tendency. 

It  should  now  be  clear  that,  with  the  actual  market  ratio  of 
silver  to  gold  approximately  35  to  1,  the  free  coinage  of  silver  at  the 
ratio  of  16  to  1,  if  adopted  by  any  one  country,  say  by  the  United 
States,  would  almost  immediately  result  not  in  national  bimetallism, 
but  in  silver  monometallism.  The  silver  necessary  to  replace  our 
1800  millions  of  gold  would  promptly  be  drawn  from  the  world's 
supply  of  silver,  or,  if  this  amount  of  silver  were  not  promptly 
available,  would  shortly  be  supplied  through  the  absorption  of  most 
of  the  current  product.  Silver  would  doubtless  sharply  rise  in  its 
exchange  ratios  to  commodities,  and  still  more  sharply  in  its  ex- 
change ratio  to  gold,  while  gold  would  somewhat  fall  in  its  general 
level  of  exchange  power.  But  the  rise  in  silver  and  the  fall  in  gold 
would  together  come  far  short  of  changing  the  world  ratio  from  35 
to  1  to  16  to  1,  and  in  any  case  could  not  long  maintain  a  ratio  so 
vastly  overvaluing  silver  either  to  goods  or  to  gold,  in  view  of  the 
respective  conditions  of  supply. 

The  annual  production  of  silver  —  at  the  coinage  ratio  of  16  to 
1  — ^  is  not  far  from  200  millions.  Making,  then,  no  account  of  the 
silver  which  free  coinage  at  this  ratio  would  attract  to  our  mints 
from  the  present  world's  stock,  and  making  no  account  of  the  in- 
evitable stimulus  to  production,  it  is  evident  that  nine  years  would 
suffice  to  furnish  from  the  mines  as  many  new  silver  dollars  as  our 
monetary  system  now  contains  of  gold  dollars.  The  displacement, 
truly,  could  not  be  unit  for  unit ;  it  would  require  more  than  1800 
millions  of  silver  dollars  to  displace  the  1800  millions  of  gold.  But 
the  world  fall  in  gold  could  not  be  very  marked.  If,  then,  the  na- 
tional free  coinage  of  silver  could  by  any  possibility  bring  even  the 
temporary  concurrent  circulation  of  silver  with  gold,  it  could  bring 
this  for  only  the  shortest  period  of  years.     Speculative  forecasts  of 


326  THE  ECONOMICS  OF  ENTERPRISE 

the  ultimate  certainty  would,  indeed,  almost  incvitablj'  veto  even 
the  temporary  success ;  gold  would  vanish  forthwith. 

Nor  with  the  certain  stimulus  upon  the  production  of  silver  and 
with  the  probable  speculative  activities,  is  it  probable  that  inter- 
national bimetallism,  no  matter  how  widespread,  could  long  endure 
at  the  ratio  of  16  to  1,  though  it  would  probablj''  establish 
itself  temporarily.  Something  like  seven  billions  of  gold  are  em- 
ployed in  one  form  or  another  in  the  world  as  money.  The  avail- 
able silver  in  the  world  —  the  silver  not  already  in  monetary  use  — 
is  a  matter  of  sheer  conjecture,  but  probably  does  not  exceed  two 
billions  out  of  a  total  stock  of  from  eight  to  nine  billions.  Till, 
then,  the  seven  billions  of  new  silver  necessary  for  the  replacement 
of  the  gold,  unit  for  unit,  were  found,  the  parity  of  silver  wdth  gold 
might  be  maintained.  The  temporary  parity  would,  indeed,  be  cer- 
tain, were  great  speculative  movements  not  both  possible  and  prob- 
able. But  it  is  at  anj^  rate  clear  that  vastly  more  than  seven  billions 
of  silver  must  be  forthcoming  in  order  to  break  the  paritj^,  in  view 
of  the  limited  non-monetary  field  to  which  gold  could  be  driven 
and  of  the  shaip  depreciation  to  wliich  it  would  be  subjected.  Gold 
would  not  drive  out  easil)^  With  its  progressi^-e  fall,  progre's- 
sivelj'  larger  would  be  the  requirement  of  silver  to  maintain  the  rate 
of  gold  outflow.  With  the  great  increase  in  the  excess  of  silver 
inflow  over  gold  outflow,  the  volume  of  money  must  be  rapidly 
ex]5anding  and  prices  correspondingly  rising.  The  volume  of  new 
silver  requisite  for  the  monej^  need  on  the  basis  of  tliis  high  level  of 
prices  would  e\-idently  be  far  bej^ond  seven  billions.  The  last  unit 
of  gold  outflow  could  be  reached  only  on  the  terms  of  this  last 
unit  being  worth  more  as  commodity  than  the  last  unit  of  silver  in- 
flow were  worth  as  money.  Finally,  however,  the  complete  dis- 
placement of  gold  bj^  silver  must  come.  And,  in  fact,  the  longer  it 
should  take,  by  reason  of  the  more  silver  that  it  would  require  — 
the  parity  thereby  the  longer  enduring  —  the  more  disastrous 
must  be  the  rise  in  prices  wliich  would  attend  it. 

Take  it,  however,  that  the  ratio  were  originally  established  at 
35  to  1  or  at  some  ratio  fairly  well  approximating  the  permanent 
market  conditions  attaching  to  the  supplies  of  the  two  metals : 
At  35  to  1  notliing  noticeable  would  happen  —  some  little  silver 
coined,  an  inconsiderable  outflow  of  gold,  an  inappreciable  effect, 
for  a  long  time  at  least,  upon  the  sj^stem  of  prices.  At  30  to  1, 
all  these  different  effects  would  be  somewhat  more  marked.  Re- 
calling, however,  that  neither  metal  can  entirely  disappear  from  the 
currency  until  the  supply  of  the  incoming  metal  can  be  sufficiently 


MONEY,  CREDIT,  AND  BANKING  327 

great  to  permit  the  last  unit  of  inflow  to  be  of  less  value  than  the 
last  unit  of  outflow,  it  is  evident  that  the  process  of  the  complete 
retirement  of  either  metal  must  extend  over  a  long  period  of  time. 

Nor,  from  the  basis  of  the  present  market  outlook,  is  it  probable 
that  silver  is  more  likely  than  gold  to  be  the  metal  to  suffer  the 
relative  fall.  The  present  trend  is  rather  toward  the  relative 
depreciation  of  gold.  It  might,  indeed,  be  either  of  the  two  metals 
that  would  finally  disappear. 

But  if  international  bimetallism  were  one  day  to  lead  to  one  or 
the  other  monometallism,  there  need  be  no  disturbance  or  disaster 
attendant  upon  the  divergence  of  the  market  ratio  from  the  coinage 
ratio,  if  only  the  process  were  so  gradual  as  to  invite  no  great  specu- 
lative activities.  And  the  process  would  almost  inevitably  be  thus 
gradual.  No  one  would  know  the  precise  time  at  which  the  process 
of  displacement  became  complete.  Nor  would  the  reestablishment 
of  bimetallism  at  some  new  ratio  offer  serious  theoretical  or  practi- 
cal difficulty. 

International  bimetallism  is,  then,  an  entirely  workable  policy 
from  the  point  of  view  of  monetary  theory,  no  matter  how  serious 
might  be  the  political  problem  of  arriving  at  the  necessary  interna- 
tional adjustments  or  of  preserving  the  unity  of  action  necessary  to 
the  continuance  of  the  system.  The  ultimate  theoretical  question  is 
rather  whether  the  system  —  granted  that  it  is  practicable  —  would 
be  worth  while.  How  much  would  it  accomplish  for  the  stability  of 
the  standard  ? 

Not  much  if  anj'thing.  First,  however,  it  must  be  made  clear  pre- 
cisely what  sort  of  stability  it  is  that  the  nature  of  the  standard 
problem  requires.  The  stability  of  any  intermediate  as  standard  is 
important  only  in  the  deferred  payment  aspect  of  the  case  —  only, 
that  is,  when  the  lapse  of  time  affects  the  problem,  as  in  loans,  or 
in  sales  on  time,  or  with  the  receipt  of  money  for  deferred  outlay, 
or  with  serial  incomes  fixed  by  contract  or  by  custom. 

It  cannot,  therefore,  at  all  matter  what  some  distant  or  original 
"level"  of  prices  may  have  been.  It  matters  merely  that  the  level 
shall  not  change  during  the  period  with  which  the  deferred  payment 
relation  is  concerned.  That  in  the  average  and  over  long  periods 
the  supply  of  money  keep  pace  with  the  demand  —  outrunning  the 
demand  at  one  time  with  rising  prices  and  lagging  behind  at  another 
time  with  falling  prices  —  neither  solves  nor  advances  the  problem. 
No  long-time  and  average  stability  of  prices  is  to  the  purpose.  These 
intermediate  and  possibly  offsetting  fluctuations  are  the  very  crux  of 
the  problem.    Whatever  may  be  the  new  level  once  established,  every 


328  THE  ECONOMICS  OF  ENTERPRISE 

deviation  from  it  is  in  itsdf  a  new  disaster,  a  disaster  which  is  in  no 
degree  to  be  mitigated  by  some  earlier  movement  in  the  opi)osite 
direction  and  which  is  without  virtue  to  justify  or  mitigate  any  later 
movement.  Every  variation  is  a  separate  evil  in  its  own  right  inde- 
pendently of  what  has  earUer  occurred  or  may  later  occur.  The 
next  variation,  though  in  the  reverse  direction  to  the  last,  is  a  new 
and  independent  evil  anil  is  neither  the  better  nor  the  worse  by  the 
fact  that,  running  counter  to  some  earlier  variation  or  offsetting 
some  probable  future  variation,  it  maj^  tend  to  preserve  some  long- 
time average  of  general  prices  or  may  aid  toward  bringing  an  errant 
price  system  back  to  some  original  or  math(!matieal  norm.  There  are 
no  norms  for  the  purpose.  Once  a  rise  has  taken  place,  that  is  in 
itself  the  sufficient  reason  why  the  new  system  should  remain  stable. 
Once  a  fall  has  taken  place,  there  is  no  better  reason  for  an  opposing 
rise  than  for  a  further  fall.  We  are  concerned  in  the  present  ques- 
tion not  to  compare  any  given  situation  with  some  original  situa- 
tion or  some  average  of  situations,  but  only  with  the  situation 
immediately  preceding.  Every  change  in  situation  establishes  a 
new  base  line  of  reckoning.  No  long-time  basis  which  is  not  also  the 
last  basis  is  pertinent  to  the  inquiry. 

In  view  of  the  fact  that  most  credit  relations  are  for  relatively 
short  terms  and  that  most  general  changes  in  prices  are  due  to 
sometliing  other  than  changes  in  the  supply  of  the  standard  —  are 
due,  that  is,  to  fluctuations  in  the  volume  of  credit  or  to  variations 
above  or  below  the  norm  of  psychological  attitude  with  reference  to 
investment  or  expenditure  —  there  is  no  great  significance  for  any 
purpose  in  that  relative  uniformitj'-  in  the  money  suppl}''  which  is 
expected  by  the  bimetallist  from  the  double  standard.  All  that  he 
can  rightly  urge  is  that,  so  far  as  these  long-time  variations  in  the 
quantity  of  money  do  actually  work  out  into  long-time  general 
movements  in  prices,  they  may  somewhat  accentuate  the  short- 
time  changes  due  to  other  causes.  And  the  bimetallist  would  rightly 
point  out  also  that  some  deferred  pajinent  relations,  e.g.,  govern- 
ment debts,  are  of  very  long  duration. 

And  for  the  bimetallic  side  of  the  case  it  is  to  be  further  noted 
that,  with  an  increasing  world  population  and  an  increasing  per 
capita  production,  and  -nnth  some  possible  trend  toward  the  further 
division  of  labor  between  individuals,  districts,  and  coimtries,  there 
must  come  a  fairly  constant  increase  in  the  volume  of  exchanges  to 
be  mediated.  Unless,  therefore,  the  use  of  credit  or  of  other  sub- 
stitutes for  coin  is  hkely  to  increase  and  to  increase  pari  passu 
with  the  volume  of  exchanges,  there  will  be  need  for  an  increasing 


MONEY,  CREDIT,  AND  BANKING  329 

supply  of  coin  in  order  that  a  long  average  stability  of  prices  be 
maintained. 

And  the  bimetallist  would  add  that  the  sources  of  supply  of 
either  gold  or  silver  are  in  the  nature  of  the  case  limited,  and  that 
with  the  progressive  exploration  of  the  world,  new  sources  of  supply 
are  likely  to  be  less  and  less  rapidly  discovered.  The  supplies  of 
neither  metal  alone  are  to  be  counted  on  to  keep  pace  with  the  need. 
The  law  of  diminishing  returns  appears  to  apply  to  the  production  of 
the  precious  metals.  Thus  the  long  future  will  probably  develop  a 
tendency  toward  falling  prices,  and  any  project  promising,  as  a  long- 
time influence,  to  mitigate  this  tendency  must  be  a  beneficent  policy. 

And  the  case  is  really  stronger  than  this  :  The  products  exchanged 
through  the  monetary  mechanism  are  in  the  main  promptly  con- 
sumed. They  do  not  greatly  accumulate.  If  the  social  product  is 
larger  by  5  per  cent  each  year,  the  aggregate  supply  of  exchange 
media  will  need  to  expand  by  this  same  per  cent  and  this  5  per  cent 
expansion  be  computed  for  each  succeeding  year  upon  the  basis  of 
the  volume  of  the  media  of  the  preceding  year.  There  will  be  required 
something  like  a  geometrical  increase  in  the  volume  of  money,  if 
the  long-i'un  but  gradual  shrinkage  in  prices  is  to  be  avoided. 

Having  now  in  mind  the  ultimate  meaning  and  the  ultimate  diffi- 
culties in  the  maintenance  of  any  long-time  stabihty  in  prices  — 
what  has  bimetallism  to  promise  either  for  short-run  stability,  the 
important  thing,  or  for  long-run  stability,  the  relatively  unimpor- 
tant thing? 

It  is  evident  that  with  bimetaUism  once  established,  the  supply 
of  coin  for  money  purposes  will  be  greater,  and  general  prices  higher 
than  had  either  metal  been  used  alone ;  on  no  other  basis  is  there 
anything  to  be  discussed  either  for  good  or  ill. 

With  bimetallism  established,  we  start,  then,  with  a  new  base  line 
of  prices.  What  are  the  chances  of  deviation  from  this  line  as  com- 
pared with  the  chances  from  a  one-standard  basis  ?  Recall  once  again 
that  we  have  no  concern  with  any  or  all  of  the  possible  fluctuations  of 
the  past ;  nor  are  we  concerned  with  any  possible  future  fluctuations 
unless  as  measured  from  the  corresponding  —  the  immediately  pre- 
ceding—  price  system.  With  each  new  base  line,  the  original  prob- 
lem would  merely  be  repeated :  Measuring  from  each  new  situation, 
with  which  policy,  the  single  or  the  double  standard,  is  fluctuation 
the  more  probable  and  the  probable  fluctuations  the  more  marked  ? 

There  are  four  possibilities  in  any  bimetallic  situation :  (1)  that 
both  gold  and  silver  are  expanding  in  supply  faster  than  the  expand- 
ing need ;   (2)  that  both  arc  lagging  behind  the  need ;   (3)  that  gold 


330  THE  ECONOMICS  OF  ENTERPRISE 

is  outrunning  the  need,  while  silver  is  lagginjj;  behind  ;   (4)  that  silver 
is  outrunning  the  need  and  gold  lagging  behind. 

(1)  Botli  outrunning  the  need: 

If  both  are  equally  outrunning  the  need,  a  rise  in  i)rices  is  inevi- 
table as  measured  from  the  general  prices  inunediatelj'  i)receding. 
Neither  metal  will  be  displacing  the  other.  The  rise  in  prices  will  be 
neither  greater  nor  less  than  it  would  have  been  with  either  alone, 
reckoning,  of  course,  in  each  case  from  the  price  system  appropriate 
to  the  case. 

But  one  metal  will  probably  be  manifesting  a  more  rapid  increase 
than  the  other :  then  the  rise  in  prices  will  not  be  as  marked  with 
both  metals  together  as  with  the  worse  one  of  the  two,  and  will  be 
more  marked  than  with  the  better  one  of  the  two  alone  :  The  result 
will  be  worse  than  with  the  better  and  better  than  with  the  worse. 

There  is  notliing  to  choose  here  between  the  bimetallic  and  the 
monometaUic  systems. 

(2)  With  both  metals  underrunning  the  need,  a  parallel  analysis 
holds.  The  fall  in  prices  will  be  less  marked  than  with  the  worse 
metal  alone  and  more  marked  than  with  the  better  metal  alone. 

(3)  and  (4)  With  one  of  the  metals  outrunning  the  need  and  the 
other  metal  underrunning,  the  price  system  attacliing  with  the 
coinage  of  both  metals  would  be  preferable  to  monometallism  with 
either  one,  reckoning  from  the  situation  appropriate  to  that  one. 

Something,  then,  there  is,  in  the  long-run  aspect,  of  advantage 
in  the  bimetallic  s^'stem  over  the  monometallic  ;  in  two  chances  out 
of  four  bimetallism  offers  the  better  outlook.  But  does  this  mean 
that,  for  these  long-run  purposes,  bimetallism  would  be  the  prefer- 
able system  —  for  whatever  of  significance  there  is  in  the  long-run 
computation  ?  Possibly  so,  but  not  clearly.  On  the  side  of  the  in- 
fluences of  technique,  the  two  metals  would  probably  concur  rather 
than  diverge  in  tendency.  So  far  as  the  discovery  of  new  sources 
of  supply  were  the  decisive  factor  —  though  probably  a  factor  of 
diminishing  importance  —  the  prospect  of  advantage  would  be  on 
the  whole  greater  under  bimetallism. 

We  maj''  conclude,  then,  that  in  a  period  of  falling  prices,  bi- 
metallism would,  at  its  inception,  tend  to  mitigate  the  tendencies 
toward  generally  lower  prices,  and  would  offer  the  prospect  of  fur- 
ther advantages  in  the  remote  future  —  advantages,  however,  of  no 
great  significance  in  the  problem.  In  a  period  of  rising  prices, 
the  harm  attending  the  initial  step  would  pretty  clearly  outweigh 
such  remote  and  unimportant  and  essentially  contingent  advantages 
as  might  befall. 


MONEY,  CREDIT,  AND  BANKING  331 

Having  now  examined  the  relations  (1)  of  gold  to  other 
moneys,  (2)  of  gold  and  these  other  moneys  to  banking,  and 
to  the  banking  function  of  credit,  (3)  of  banking  and  credit 
to  the  volume  of  currency,  (4)  of  the  volume  of  currency  — 
moneys  and  credit  —  to  prices,  and  (5)  of  the  relation  of 
the  volume  of  currency  to  the  volume  of  funds  for  loan  at 
interest,  —  we  are  ready  to  undertake  an  examination  of 
the  forces  and  processes  fixing  at  any  time  the  rate,  or  the 
different  rates,  of  interest. 


CHAPTER  XVIII 


LOAN    FUND   CAPITAL 


The  rate  of  interest.  —  Interest  in  the  actual  competitive 
organization  of  society  has  already  been  defined  as  the  pre- 
mium which  general  purchasing  power,  expressed  in  terms 
of  money,  commands  over  future  purchasing  power  similarly 
expressed.  The  rate  of  interest  is  this  premium  ex^Dressed 
as  a  percentage  —  whether  as  a  rate  of  increment  to  attach 
at  a  future  time  to  a  present  sum  of  dollars  as  principal, 
or  as  a  percentage  of  discount  to  which  a  future  sum  of  dollars 
is  subjected  in  reaching  a  sum  of  present  worth  in  dollars. 
Always  and  everywhere  an  interest  rate  reports  the  relation 
of  exchange  existing  between  present  dollars  and  future 
dollars.  The  rate  expresses  the  terms  of  exchange  as  a 
ratio  —  100  of  present  dollars  against  105  of  future,  or 
105  of  future  dollars  against  100  of  present  dollars. 

This  is  not  at  all  to  assert  that  the  same  phenomenon  — 
or  a  similar  phenomenon  —  might  not  be  present  in  some 
other  form  of  society  and  be  expressed  in  other  terms,  but 
only  that  in  the  present  society  interest  is  a  pecuniary  cate- 
gory in  a  dollar  computation.  Much  confusion  will  be 
avoided  by  holding  this  truth  in  firm  grasp. 

The  rate  an  exchange  adjustment. — The  terms  on  which 
present  purchasing  power  exchanges  against  future  purchas- 
ing power  is  therefore  one  more  problem  in  the  adjustment 
of  price.  There  are  offers  of  present  purchasing  power  and 
there  are  bidders  for  it.  The  rate  per  cent  is  the  point  of 
adjustment  between  supply  and  demand.  The  interest 
problem,  then,  like  any  other  problem  in  price,  leads  to  an 
examination  of  the  nature  and  sources  of  the  demand  for 
loans  of  purchasing  power,  on  the  one  .side,  and  of  the  origin 
and  nature  of  the  supply,  on  the  other  side.     Our  problem 

332 


LOAN  FUND  CAPITAL  333 

will,  then,  later  lead  to  an  examination  of  the  two  inevitable 
aspects  of  every  price  investigation :  (1)  What,  on  the 
demand  side,  determines  the  dispositions  to  pay,  (2)  what 
determines  how  great  is  the  supply,  and  the  terms  on  which 
the  various  units  of  it  are  offered. 

Capital  and  loan  fund  capital.  —  First,  however,  there  is  need 
to  make  a  general  survey  of  capital  in  the  large,  in  order  to  make 
precise  the  place  and  significance  in  society  of  the  loan  fund  variety 
of  capital.  That  moneys  and  credits  are  private  capital  will  need 
no  further  repetition.  But,  as  forms  of  capital  peculiar  to  the  com- 
petitive organization  of  society,  are  they  not  distinctively  and 
peculiarly  competitive  in  their  functions?  And  if  either  money 
or  credit  is  social  capital,  are  both  social  capital  upon  the  same 
level?! 

What  media  are  capital.  —  It  was  made  clear  in  Chapters  III 
and  IV  that  in  a  competitive  society  the  medium  of  exchange  is 
a  necessary  means  to  the  enjo3Tnent  of  the  great  advantages  attend- 
ant upon  the  division  of  labor ;  that  it  is  solely  through  being 
a  price  economy  —  a  money  economy  —  that  a  competitive  society 
can  be  efficiently  organized  for  purposes  of  production;  that 
precisely  because  exchange  is  a  socially  productive  process,  the 
commodity  or  commodities  selected  as  intermediates  in  exchange 
must  be  held  to  serve  a  function  as  important  as  that  of  any  other 

1  That  the  concept  of  social  capital  is  essentially  a  vague  concept 
is  not  to  be  questioned ;  all  of  the  preceding  discussions  have,  in- 
deed, in  terms  or  by  repeated  implication,  emphasized  this  objec- 
tion and  this  protest.  Only  by  antithesis  to  the  intelligible  and 
actual  categories  of  individual  enterprise  can  the  social  concept 
approximate  to  anything  like  tangibility.  But  none  the  less  the 
notion  has  a  content  —  only  that  it  is  discouragingly  indefinite. 
There  clearly  is  a  grand  total  of  land  and  of  equipment  contribut- 
ing to  the  aggregate  production  and  consumption.  But  precisely 
what  things  rank  within  this  total  ?  Or  what  shall  stand  as  the 
common  denominator  under  which  they  can  be  aggregated  ?  Com- 
petitive prices  will  not  serve. 

The  difficulty  with  the  concept  of  social  capital  is  really  the  same 
as  with  the  concept  of  social  productivity  :  appraisals  of  the  objec- 
tive facts  are  mixed  and  confused  in  the  concept  with  the  facts 
themselves.  Is  land  capital  ?  All  land  —  wheat,  champagne, 
and  opium  lands  equally  ?  So,  again :  some  factories  are  social 
capital.     But  corset  factories  ?     Peruna  and  Hop  Bitters  factories  ? 


334  THE  ECONOMICS  OF  ENTERPRISE 

of  the  tools  of  industry.  Currency  —  money,  or  credit  substitutes 
for  money  —  is  one  of  the  most  effective  of  labor-saving  aijjiliances. 
Therefore,  the  bullion  utilized  for  this  purjiose  is  not  only  social 
wealth  and  social  cai)ital,  but  it  is  social  cai)ital  at  a  very  high 
degree  of  productiveness  —  a  wise  and  necessary  social  investment, 
a  means  of  conveyance,  of  transportation,  of  the  same  general 
type  of  service  as  liighways  or  freight  cars,  but  outranking  these 
in  degree  of  usefulness. 

Money  is,  therefore,  not  merely  private  capital,  but  it  is  also 
social  capital,  a  source  of  gain  to  the  individual  and  a  source  of 
service  to  society.  Bullion  money  is,  however,  not  the  only  capital 
that  is  lent.  Bank  notes  and  greenbacks  and  deposit  credits  are 
clearl}'  private  capital;  are  they  also  social  capital?  If  every 
creditor  is  the  richer  by  the  credit,  is  there  not  somewhere  a  debtor 
who  is  correspondingly  poorer  ?  Credits  are  mere  claims ;  to  cancel 
them  would  seemingly  not  affect  the  total  social  wealth,  but  would 
only  redistribute  it. 

Credit  as  capital.  —  But  the  truth  is  that  so  far  as  these  relations 
of  liability  from  one  member  of  society  to  another  serve  as  media 
of  exchange,  they  are  more  than  credits ;  they  are  credits  which 
are  fulfilling  a  social  function.  However  imperfectly  they  may 
fulfill  tliis  function,  they  dispense  with  the  use  of  bullion  for  that 
purpose.  If  coinage  currency  is  a  labor-saving  device,  credit 
currency  is  a  bullion-saving  device.  Regarded,  then,  in  this  light, 
it  is  not  illogical  to  view  credit  money  as  social  wealth.  The 
objection  is,  however,  also  forcible  that  knowledge  and  experience 

Town  Topics  printing  presses  ?  Burglars'  jimmies  ?  Tax-farming 
contracts  ?     Breweries  ?     Soda  fountains  ?     Counterfeiting  tools  ? 

Or,  again,  carpenters  and  masons  are  socially  productive ;  so  — 
often  —  the  doctors  ;  most  preachers  —  if  their  doctrine  is  good  ; 
some  teachers  —  those  that  teach  the  right  theory.  But  ballet 
girls  ?  Lawyers  ?  Adulterating  chemists  ?  Bar  tenders  ?  Sol- 
diers ? 

It  is  the  unprecision  of  these  social  concepts  which,  even  when 
by  antithesis  they  are  relevant  to  competitive  activities,  leaves 
the  concepts  unadapted  to  accurate  and  analytical  thinking. 
Thus  the  justification  for  employing  them  is  found  only  as  pro- 
viding a  vague  or  negative  backgi'ound  against  which  to  outline 
the  precise  and  actual  concepts  of  the  present  competitive  order. 
Competitive  capital  and  social  capital  are  neither  concentric  nor 
separate  circles.  Each  includes  some  part  of  the  other's  field  — 
intersecting  circles  —  only  that  the  competitive  concept  is  limited 
and  definite  in  circumference,  the  social  concept  rather  a  formless 
smudge  than  a  circle. 


LOAN  FUND  CAPITAL  335 

arc  likewise  effective  for  the  saving  of  labor  and  of  wealth,  and  are 
yet  not  wealth  —  whatever  other  or  better  thing  they  may  be 
held  to  be.  They  belong  rather  to  the  organism  than  to  the  en- 
vironment; they  are  not  facts  objective  to  the  possessor.  If  a 
method  were  possibly  to  be  discovered  in  a  competitive  society 
of  dispensing  with  money  of  any  sort,  no  room  would  remain  for 
asserting  that  an  increase  in  wealth  had  so  far  taken  place.  The 
change  would  be  one  of  institutions,  of  human  development,  precisely 
as,  when  medical  wisdom  is  more,  pills  and  tonics  may  be  less. 
But  the  wisdom  is  not  wealth,  and  while  the  pills  are  still  wanted 
they  are  wealth. 

The  distinction  is  a  nice  one  and  not  altogether  satisfactory. 
If  credit  is  not  social  wealth,  it  is  none  the  less  clearly  private 
wealth.  And  it  is  a  sort  of  private  wealth  that  has,  at  times  and 
within  limits,  a  social  serviceability.  Money,  at  any  rate,  is  not 
in  any  especial  or  peculiar  or  emphatic  sense  a  distinctly  private 
and  competitive  form  of  capital.  It  is  merely  a  form  of  private 
capital  that  is  peculiar  to  the  competitive  organization  of  society  — • 
characteristic  of  it  and  central  in  it,  and  of  the  highest  significance 
in  the  actual  functioning  of  it.  It  and  its  substitutes  are  the  things 
trafficked  in  in  the  interest  market.  Credit,  as  the  substitute 
for  money,  and  as  in  volume  outranking  money  itself  as  medium 
of  exchange,  and  as,  by  its  variations  in  supply,  furnishing  most  of 
the  important  changes  in  the  market  situation  and  the  market 
rate  of  adjustment  of  supply  to  demand,  is  the  chief  and  most 
important  ingredient  in  the  aggregate  fund  of  suspended  purchasing 
power  and  in  the  supply  of  currency  for  loan. 

What  private  capital  includes.  —  Private  capital,  that  form 
of  capital  with  which  actual  business  is  concerned,  includes,  as  we 
have  seen,  all  forms  of  durable  private  wealth  —  all  such  property 
of  any  individual  as  requires  an  appreciable  period  of  time  for  the 
rendering  of  its  service,  —  all  possessions  any  of  the  incomes  of 
which  are  so  far  remote  in  time  that  some  of  these  suffer  in  present 
price  estimation  by  the  very  fact  of  this  remoteness,  —  all  wealth 
the  present  worth  of  which  involves  the  apphcation  of  the  principle 
of  time  discount,  —  all  wealth  remunerated  according  to  the  dollar- 
time  unit.  Private  capital  is  merely  those  private  possessions  which 
are  bases  of  private  income.  This  capital  is  productive,  truly,  — 
acquisitive,  gainful,  —  but  not  necessarily  so  in  the  social  sense  of 
contributing  to  the  general  welfare  or  of  increasing  the  aggregate 
of  incomes,  but  only  of  increasing  the  owner's  income. 

We  shall  later  have  occasion  to  examine  the  relations  between 


336  THE  ECONOMICS  OF  ENTERPRISE 

sa\dng  or  abstinence  and  the  amount  and  the  growth  of  capital. 
For  present  purposes,  however,  it  is  important  only  to  understand 
fully  in  what  jn-ivate  capital  actually  consists,  in  order  thoroughly 
to  appreciate  the  relation  which  exists  between  the  sui)pl,y  of  loan 
fund  and  the  quantity  of  private  capital  in  general,  and  th(5  connec- 
tion also  between  tlie  supply  of  loan  fund  and  the  income  upon 
private  capital  in  general. 

CoUectivist  capital.  —  For  Crusoe,  capital,  as  his  store 
of  wealth,  his  well-to-do-ness,  his  aggregate  of  provision 
for  the  future,  would  obviously  include  his  land  as  well 
as  his  other  equipment  goods,  irrespective  of  whether  any 
process  of  saving  had  conditioned  their  existence,  or  whether 
any  possible  waste  or  improvidence  or  ill  luck  could  impair 
or  destroy  them.  His  boat  and  his  appliances  for  hunting 
and  fishing  would  rank  in  the  same  class  with  his  garden, 
his  quarries,  and  his  range  of  land  for  hunting.  Whether 
his  place  of  shelter  were  a  cabin  of  his  own  building  or  a 
cave  of  his  finding,  in  either  case  it  would  be  a  part  of  his 
possessions  for  the  rendering  of  service  with  time.  Whether 
its  origin  were  in  an  earlier  saving,  and  whether  its  contin- 
uance were  conditioned  upon  continued  restraint,  or  whether, 
on  the  contrary,  it  existed  as  both  an  original  and  an  inde- 
structible bounty  of  nature,  would  be  alike  irrelevant.  It 
would  be  sufficient  that  the  thing  exist  with  its  significance 
for  continuing  service.  In  truth,  the  land  that  always  was 
and  could  not  be  deteriorated  would  be  possibly  the  best 
part  of  his  belongings. 

And  together  with  these  unproduced,  unearned,  and 
indestructible  items  of  wealth  effective  for  service  with 
passing  time,  and  together  also  with  his  appliances  for 
fishing  and  hunting,  he  would  possess  some  small  supply, 
however  meager,  of  goods  for  amusement  and  pleasure  and 
comfort.  These  also  yield  their  appropriate  incomes.  And 
included  within  his  total  possessions  for  future  service  would 
be  his  store  of  food  for  the  time  of  dearth  and  his  supply 
of  fuel  for  the  season  of  cold.  This  food  and  this  fuel  would 
rank  with  land  and  garden  plot  and  ax  and  rifle,  each  de- 
riving its  significance  and  its  capital  standing  from  its 
applicability  to  future  needs. 


LOAN  FUND  CAPITAL  337 

Obviously,  then,  some  part  of  the  capital  store  of  an 
isolated  individual,  and  the  larger  part  of  the  increase  in 
this  store,  must  be  due  to  the  productive  efficiency  either 
of  his  labor  or  of  the  natural  wealth  in  his  control.  His 
capital  would  be  his  durable  possessions.  But  the  amount 
and  the  rapidity  of  its  increase,  depending  in  the  first  in- 
stance upon  the  quantum  of  product,  must  depend  second- 
arily and  at  the  final  stage  upon  his  disposition  of  this 
product  —  upon  whether  he  consume  it  or  save  it.  It  may 
be,  however,  that  some  of  this  increase  he  could  not  consume 
if  he  would :  the  trees  of  Crusoe's  island  will  grow  and  the 
walls  of  his  cave  will  harden,  all  to  his  advantage  and  beyond 
his  power  of  veto. 

A  collectivist  society  presents  a  case  similar  in  most 
respects.  Some  part  of  its  capital  is  the  pure  bounty  of 
nature,  and  not  a  little  of  it  is  beyond  the  possibility  of  wear- 
out  or  waste.  But,  in  the  main,  the  increase  will  be  subject 
to  the  same  twofold  condition  of  production  and  of  appro- 
priation to  future  needs.  Some  part  of  this  provision  for  the 
future  will  embody  itself  in  instrumental  goods,  some  part 
in  durable  consumption  goods,  some  part  in  consumable 
goods  postponed  in  time  of  consumption.  To  the  extent 
that  the  economy  is  collective  it  has  no  other  way  of  increas- 
ing the  social  possessions.  Social  capital  is  durable  social 
wealth. 

Competitive  increases  in  social  capital.  —  In  the  com- 
petitive society,  however,  little  or  nothing  of  the  foregoing 
holds  true,  excepting  so  far  as  the  facts  are  somehow  trans- 
lated into  a  collective  accounting  and  a  balance  struck  in 
collective  terms.  The  actual  economy  is  characteristically 
an  entrepreneur  economy  in  which  production  and  business, 
and  the  direction  of  them,  rest  with  the  entrepreneur  in  his 
pursuit  of  gain.  True,  some  part  of  the  activities  of  society 
and  some  part  of  the  increase  in  social  equipment  are  con- 
trolled by  the  state  or  the  government ;  but  just  so  far  the 
society  is  not  competitive  in  character,  but  collective.  In 
the  entrepreneur  organization  of  things,  there  are  important 
steps  intervening  between  individual  saving  and  social 
saving,  either  of  consumption  goods  or  of  production  goods. 


338  THE  ECONOMICS  OF  ENTERPRISE 

The  entrepreneur  is  in  charge.  Or,  if  the  corporate  organiza- 
tion is  chosen,  even  th(>n  the  first  step  is  to  get  together 
funds,  to  collect  a  number  of  small  capitals  into  an  aggregate 
sufficiently  large  for  the  purpose.  It  is  always  with  the 
entrepreneur  function  that  the  direction  of  investment  lies. 
On  the  whole,  therefore,  the  increase  of  industrial  equip- 
ment does  not  take  place  in  the  same  way  in  a  competitive 
society  as  in  the  isolated  or  the  collective  economy.  Doubt- 
less a  man  in  possession  of  property  or  of  funds  may,  in  the 
competitive  society,  rent  out  his  property,  for  example  a 
farm,  rather  than  sell  it ;  or  he  may  himself  make  directly 
an  increase  of  equipment  goods.  Just  as  a  collective 
society  might  set  aside  a  portion  of  the  current  social  income 
for  future  use,  or  might  apply  a  certain  share  of  productive 
power  to  the  creation  of  aids  to  future  production,  or  of 
goods  for  future  service,  the  laborers  so  directed  subsisting 
meanwhile  upon  the  current  production  of  industry  or  upon 
stored-up  products,  so  the  individual  in  a  competitive  society 
may  —  but  ordinarily  does  not  —  set  himself  to  the  direct 
creation  of  social  wealth.  Instead,  he  commonly  saves 
"  money  "  out  of  his  individual  income,  or  sells  property, 
in  either  case  lending  his  available  funds  to  an  entrepreneur 
or  to  an  entrepreneur  enterprise.  The  resulting  credit 
is  as  much  a  part  of  his  private  wealth  as  was  the  current 
income  or  the  receipts  from  the  sale. 

It  does  not,  however,  follow  that  his  own  increase  in 
wealth  is  also  a  social  increase.  The  buyer  of  the  things 
which  this  capitalist  sells  may  forthwith  consume  them ;  but 
this  does  not  at  all  matter  to  the  capitalist  or  to  the  amount 
of  funds  which  he  has  for  loan.  So,  the  saving  out  of  his 
individual  income  is  not  at  all  certain  to  be  a  saving  to  society 
in  the  aggregate.  It  suffices  for  his  purpose  and  for  the 
growi:h  of  the  loan  fund  that  somehow  he  has  secured  a 
certain  income,  and  has  refrained,  in  some  measure,  from 
making  purchases  in  the  market.  The  aggregate  social 
consumption  is  not  the  less  because  of  this  "  abstinence  " ; 
the  other  purchasers  have  simply  profited  by  this  diminution 
of  demand.  When  he  concludes  —  as  an  equivalent  of  his 
past  restraint  —  to  consume  in  excess  of  his  current  pro- 


LOAN  FUND  CAPITAL  339 

duction,  other  purchasers  will  suffer  by  the  resulting  exten- 
sion of  demand.  In  short,  individual  "  abstinence,"  in 
the  present  industrial  organization,  is  a  condition  precedent 
to  social  saving,  and  therefore  to  the  possibility  of  social 
capitalization;  but  it  is  not  social  saving,  nor  is  it  social 
capitalization.  The  capitalist  in  the  above  case  has  saved 
himself  a  right  to  direct  in  purpose  and  manner  a  future 
application  of  wealth  or  activity.  It  must  rest  with  the 
decision  of  the  borrower  of  the  capital  funds  —  and  with 
the  lender's  decision  only  as  it  affects  the  decision  of  the 
borrower  —  whether  social  capitalization,  an  increase  in 
social  equipment  or  durable  goods,  does  or  does  not  take 
place.  Thus,  while  the  creation  of  social  wealth  may  take 
place  without  an  appeal  to  the  loan  market,  it  does  not  or- 
dinarily so  take  place.  Obviously,  it  is  not  an  easy  matter 
to  estimate  the  volume  of  the  more  direct  and  more  simple 
form  of  the  increase  of  social  wealth.  It  suffices  to  say  that 
it  is  relatively  a  diminishing  method,  that  it  calls  for  no 
especial  labor  of  analysis,  and  that  it  is  for  the  most  part 
unrelated  to  the  phenomena  of  the  loan  market  —  to  the 
borrowing  of  capital  and  to  the  fixation  of  interest.  Speak- 
ing in  the  large,  wealth  or  capital  in  the  social  sense  does 
not  get  borrowed,  and,  if  borrowed,  is  not  involved  in  the 
interest  contract. 

Thus  the  amount  of  social  wealth  or  social  capital  in  society  is 
no  test  or  measure  of  the  supply  of  loan  fund  excepting  in  the  degree 
that  the  individual  holdings  of  social  wealth  may  affect  the  resources 
of  individual  lenders  or  the  credit  of  individual  borrowers.  An 
illustration  will  serve  to  make  the  principle  clear:  Assume  an 
isolated  community  of  1000  farmers,  competitively  organized  but 
still  in  a  barter  economy  —  that  is,  without  money  and  without 
institutions  for  the  circulation  of  credit.  Suppose  that  999  of 
these  farmers  have  each  his  farm  with  the  ordinary  equipment 
of  implements,  the  while  that  there  is  still  another  farmer  with 
999,000  head  of  cattle.  Assume  now  that  an  entrepreneur  from 
somewhere  appears  in  the  community  with  the  purpose  of  construct- 
ing a  railroad  :  how  shall  he  go  about  the  financing  of  it  ? 

There  is  no  capital  available  for  his  purposes.  It  is  true  that 
there  is  one  wealthy  man  in  the  community,  a  man  who  would 


340  THE  ECONOMICS  OF  ENTERPRISE 

gladly,  on  approved  security,  lend  indefinite  sums  —  of  cattle. 
But  railroad  construction  cannot  be  financed  on  this  basis,  unless, 
indeed,  to  the  extent  that  the  cattle  can  be  made  to  serve  as  a 
form  of  currency.  The  difficulty  is  not  that  there  is  a  lack  of 
wealth  in  the  community,  but  that  this  wealth  is  not  in  practicably 
lendable  form. 

But  if,  now,  it  be  assumed  that  these  cattle  can  be  sold  out  on 
credit  among  these  nine  hundred  and  ninety-nine  farmers,  their 
notes  taken  and  discounted  into  deposit  credits;  or  even  if  against 
these  farmers  there  are  taken  contracts  or  due  bills  or  acceptances 
or  orders  dischargeable  on  demand  in  labor  or  in  produce,  there 
will  forthwith  exist  in  tliis  society  a  supply  of  loan  fund  capital 
of  a  character  suited  to  the  needs  of  the  enterprise  in  hand. 

And  if  it  be  objected  that  this  really  amounts  to  the  same  thing 
as  lending  the  cattle,  only  that  the  method  is  roundabout  and 
less  simple,  all  this  must  be  admitted,  but  with  the  important  modi- 
fication that  the  other  way  is,  for  the  purpose  of  the  borrowing 
of  capital,  an  impracticable  or  even  an  impossible  method :  debts 
must  exist,  that  is,  collectible  rights  in  money  or  in  other  forms  of 
wealth  —  for  money  is  for  many  purposes  only  a  form  of  credit 
—  must  exist,  before  these  credit  rights  can  be  lent ;  and  nothing 
else  can  practicably  be  lent. 

And  there  is  this  still  more  important  modification :  Suppose 
all  these  cattle  to  have  been,  immediately  after  the  sale,  swept 
away  by  disease.  If  the  debtors  are  still  solvent,  the  loss  is  theirs 
and  not  that  of  the  capitaUst.  They  are  in  the  aggregate  much 
poorer ;  but  he  is  as  well  off  as  before,  and  has  not  a  jot  less  "  capi- 
tal "  to  lend.  That  is  to  say,  the  volume  of  loan  fund  in  a  society 
has  no  direct  or  necessary  relation  —  still  less,  proportion  —  to 
the  wealth  of  the  society  in  question.  It  is  true  that  if  these  farmers 
had  nothing  left  to  pay  with,  the  debts  might  be  uncollectible  and 
thereby  fall  out  of  the  fists  of  capital;  but  so  also  they  might 
not,  if  only  it  were  true  that  the  laws  of  the  society  or  its  business 
code  of  morality  made  the  debts  collectible  either  in  terms  of  com- 
modities or  of  services.  A  debt  that  is  secured  by  character  is  as 
good  an  investment  and  as  truly  private  capital  as  any  other,  if 
only  it  be  really  as  secure. 

The  nature  and  supply  of  loan  funds.  —  It  is  thus  clear 
that  in  the  typical  case  of  an  appeal  to  the  loan  market 
for  so-called  capital  there  need  be  neither  social  capital  nor 
social  wealth  in  existence  to  which  the  loan  fund  capital 
traces  its  existence  or  upon  which  it  is  based  or  into  which 


LOAN  FUND  CAPITAL  341 

it  has  as  yet  flowed.  There  exist  against  society  in  the  form 
of  hoarded  money,  or  against  banks  in  the  form  of  bank- 
notes, deposits,  and  savings  accounts,  or  against  individuals 
in  the  form  of  different  species  of  claims,  rights  of  direction 
over  the  application  of  labor  and  commodities.  Every 
credit  represents  such  a  right.  The  loan  market  consists 
of  these  rights  and  of  nothing  else.  It  is  not  because  of  her 
store  in  hand  of  iron  or  wood  or  provisions  that  England  is 
able  to  supply  the  so-called  capital  for  endless  railroad 
building ;  and  the  construction  of  railroads  in  America  or 
Africa  by  means  of  English  capital  does  not  ordinarily  mean 
the  transportation  from  England  of  any  considerable  amount 
of  commodities  for  this  purpose. 

It  is  true  that  there  is  a  theoretical  outside  limit  to  the  amount 
of  capitalization  which  can  take  place  during  any  particular  period. 
Only  so  much  productive  energy  can  be  diverted  to  future  production 
as  can  be  spared  from  the  necessities  of  immediate  consumption. 
But  the  demands  of  immediate  consumi^tion  are  very  flexible. 
Practically,  no  limit  of  any  sort  exists  except  the  food  limit ;  and 
the  supply  of  food  being  mostly  periodic,  and,  if  scanty,  incapable 
for  a  period  of  some  months  of  being  largely  affected  by  an  immediate 
application  of  labor,  and  not  ordinarily  increased  above  the  average 
by  the  application  of  an  exceptional  amount  of  labor  to  the  pro- 
duction of  a  new  crop,  it  results  for  practical  purposes  that  the 
amount  of  labor  apphcable  to  remote  ends  is  not  greatly  lessened 
by  insufficient  harve.sts.  It  may,  indeed,  be  increased  by  the  sharp 
competition  of  wage-earners  to  obtain  as  large  a  share  as  possible 
of  the  short  food  supply.  It  is  true  that  this  view  leaves  out  of 
consideration  the  average  of  years ;  for,  in  this  average,  as  many 
laborers  will  devote  themselves  to  the  production  of  necessaries 
as  find  the  prices  of  necessaries  averaging  high  enough  to  make  it 
worth  while.  Normally,  the  appHcation  of  energy  for  future 
purposes  must  be  secured  from  laborers  not  requisite  to  this  pro- 
duction of  necessaries  for  immediate  consumption.  But  how 
much  of  this  labor,  possibly  apphcable  to  remote  ends,  will  be  so 
applied,  will  depend  not  on  the  possessors  of  capital  in  the  form 
of  shops,  and  tools,  and  lands,  nor  upon  the  possessors  of  products 
ready  for  consumption,  but  upon  the  possessors  of  these  choses 
(claims)  en  action  against  society  or  against  individual  members 
thereof,  —  these  rights  of  direction  of  labor,  of  which  bank  and 
savings  deposits  form  a  large  proportion  and  are  typical  examples. 


342  THE  ECONOMICS  OF  ENTERPRISE 

Nor,  usually,  does  any  possessor  of  material  property  or  wealth 
become  a  lender  of  capital  until  he  has  parted  with  his  material 
wealth  and  become  a  holder  of  some  proportion  of  these  rights. 
The  creation  of  social  capital  is  ordinarily  conditioned  on  the 
transfer,  in  the  form  of  loans,  of  these  rights  of  direction  to  pro- 
jectors of  enterprises.  It  is  only  the  loan  fund  that  commonly 
is  lent. 

Funds  and  aggregate  welfare.  —  Loans  are  made  from  such 
})rivate  cash  resources  of  inchviduals  as,  not  being  spent,  are  avail- 
able for  lending.  Through  the  lending  of  these  there  may  or  may 
not  result  an  increase  in  the  aggregate  social  wealth.  In  either 
case  the  loans  remain  equally  private  capital.  If  the  funds  go  to 
finance  administrative  deficits  or  jingo  wars,  this  is  neither  better 
nor  worse  for  the  investor  than  if  they  bring  into  existence  rail- 
roads or  flouring  mills  or  chair  factories.  He  may  get  even  better 
rates  of  interest  return  by  financing  some  spendthrift  expectant 
heir,  and  need  not  suffer  in  point  of  security. 

We  may  conclude,  then,  that  the  loan  fund  is  a  category  of 
capital  peculiar  to  itself,  and  that  whether  capital  funds  are  or  are 
not  abundant  in  a  given  society  is  a  matter  not  dependent  upon  the 
total  supply  of  social  wealth  or  social  capital ;  and  that  whether 
social  capitalization  does  or  does  not  take  place  is  not  decided 
either  by  the  amount  of  wealth  in  the  society  or  by  the  amount  of 
available  loan  fund,  but  only  by  the  direction  which  the  invest- 
ments made  through  this  loan  fund  take. 

Loaned  thing,  repaid  thing,  premium  thing,  all  currency.  — 

Holding  now  firmly  in  mind  that  the  loan  fund  form  of 
capital  is  a  fund  of  purchasing  power  seeking  borrowers,  — 
a  fund  made  up  of  the  standard  commodity  and  of  units 
of  credit  interchangeable  with  it,  —  we  are  in  possession  of 
all  the  facts  fundamental  to  the  interest  problem.  It  is 
in  terms  of  the  standard  that  the  interest  contract  actually 
runs.  And  note  once  again  that  not  only  is  the  interest 
premium  one  of  present  purchasing  power  in  terms  of  the 
standard  over  future  purchasing  power  in  terms  of  the 
standard,  but  that,  in  our  present  society,  it  can  hardly  be 
anything  else.  It  is  true  that  in  any  relation  of  deferred 
payments  anything  —  wheat,  cloth,  cattle,  labor  — ■  might 
be  taken  as  the  standard  in  which  payment  should  later 
be  made,  just  as  now  rent  is  sometimes  paid  in  grain.     But 


LOAN  FUND  CAPITAL  343 

for  most  purposes  there  is  only  one  practicable  standard. 
As  it  is  general  purchasing  power  that  is  commonly  borrowed, 
so  it  is  commonly  only  in  general  purchasing  power  that 
payment  can  practically  be  stipulated.  The  business  man's 
expenses  are  all  reduced  to  terms  of  price  and  his  gains, 
if  he  make  any,  are  a  differential  in  price.  And,  as  we  have 
already  seen,  no  other  computation  is  of  the  slightest  moment 
to  him,  unless  possibly  as  somehow  derivative  from  the  price 
gain  which  he  is  engaged  in  seeking.  Any  practicable 
medium  of  payment  must  be  either  something  that  the 
creditor  can  use  directly  or  something  that  he  can  employ 
as  purchasing  power.  To  choose  as  a  standard  a  commodity 
for  direct  use  would  be  difficult,  and  to  choose  any  other 
commodity  is  to  make  that  commodity  an  intermediate  of 
exchange  for  the  particular  case  —  and  to  accept  the  greater 
dangers  of  fluctuation  which  go  with  all  ordinary  commodities 
—  from  which  dangers,  indeed,  money  is  only  relatively 
exempt.  But  money  is  at  any  rate  relatively  exempt;  7 
and  for  most  of  the  purposes  of  the  business  man  the  slight  7 
fluctuations  to  which  it  is  subject  are  mostly  or  entirely  • 
irrelevant. 

But  even  if  money  were  not  the  best  medium  or  standard 
in  which  loans  may  be  made,  credits  extended,  payments 
contracted,  and  interest  computed,  it  would  still  stand  as 
true  that  it  is  the  actual  medium  for  all  of  these  purposes. 
Interest  is  a  charge  for  the  time-use  of  wealth,  computed 
upon  the  dollar-time  unit  —  a  per  cent,  per  dollar,  per 
period. 

The  situation  stated. —  It  may  now  be  taken  as  established, 
and  must  be  firmly  grasped,  that  the  "  capital  "  that  is 
borrowed  is  suspended  purchasing  power  in  the  form  of 
money  or  of  credit  substitutes  for  money;  that  the  credit 
granted  runs  as  a  specific  sum  of  money,  the  standard,  and 
that  the  debt  incurred  runs  as  a  promise  to  return  a  specific 
sum  of  money;  and  that  capital  in  the  credit  relation  is 
something  quite  different  from  social  equipment  or  even  from 
individual  wealth  in  general.  If,  therefore,  the  term  loan 
fund  or  some  equivalent  term  were  adopted  to  indicate  the 
actual  thing  that  is  borrowed,  a  deal  of  confusion  would 


344  THE  ECONOMICS  OF  ENTERPRISE 

be  avoided,  and  less  hazy  conceptions  would  obtain  with 
regard  to  the  "  centers  of  capital  "  and  the  ''  increase  of 
capital"  and  the  "countries  rich  in  capital."  The  thing 
loaned  as  capital  is  merely  the  power  to  buy  things  or  to 
direct  the  application  of  productive  energies.  The  abun- 
dance of  loan  funds  is  determined  more  by  the  degree  of 
complexity  in  credit  relations  than  by  the  existing  quantity 
either  of  social  or  of  private  wealth. 

The  loan  fund  not  a  theoretical  novelty.  —  Some  progress  has 

perhaps  been  made  in  the  foregoing  analj'sis  toward  a  clear  defini- 
tion and  a  conscious  recognition  of  the  loan  fund  subdivision  of 
private  capital.  It  is  now  to  be  noted  that  there  is,  in  essentials, 
nothing  new  or  rcvolutionar}^  in  this  loan  fund  doctrine :  this  is 
indeed  not  so  much  in  need  of  recognition  as  of  emphasis.  The 
new  significance  of  the  doctrine  will  be  rather  found  in  the  uses 
that  are  later  made  of  it.  The  truth  is  that  the  hterature^of  polit- 
ical economy  has  for  decades  been  full  of  the  loan-fund  concept, 
sometimes  consciously  and  explicitly  held,  sometimes  tacitly  and 
half-consciously  assumed.  The  points  of  present  emphasis  are 
merely,  (1)  that  the  loan  fund  is  distinctly  and  exclusively  a  con- 
cept belonging  to  the  regime  of  individual  property  and  competitive 
business,  that  it  involves  a  clear  recognition  of  the  distinction 
between  social  capital  and  private  capital,  and  that  it  is  meaning- 
less from  the  social  point  of  view  and  is  inconsistent  with  it, 
(2)  that  it  is  not  private  capital  in  general  with  which  the  capital 
market  is  concerned,  but  only  the  loan  fund  subdivision  of  private 
capital. 

Consider,  for  example,  the  following  from  Ricardo : 

"  Capital  is  apportioned  precisely,  in  the  requisite  abundance 
and  no  more,  to  the  production  of  the  different  commodities  which 
happen  to  be  in  demand.  With  the  rise  or  fall  of  prices  .  .  . 
capital  is  either  encouraged  to  enter  into,  or  is  warned  to  depart 
from,  the  particular  emplojonent  in  which  the  variation  has  taken 
place.  Whilst  every  man  is  free  to  employ  liis  capital  where  he 
pleases,  he  mil  naturally  seek  for  it  that  employment  which  is 
most  advantageous ;  he  will  naturally  be  dissatisfied  with  a  profit 
of  10  per  cent,  if  by  removing  his  capital  he  can  obtain  a  profit 
of  15  per  cent.  ...  It  is  perhaps  very  difficult  to  trace  the  steps 
by  which  this  change  is  effected  :  it  is  probably  effected  by  a  manu- 
facturer not  absolutely  changing  his  employment,  but  only  lessen- 


LOAN  FUND  CAPITAL  345 

ing  the  quantity  of  capital  he  has  in  that  employment.  In  all  rich 
countries  there  is  a  number  of  men  forming  what  is  called  the 
moneyed  class ;  these  men  are  engaged  in  no  trade,  but  live  on  the 
interest  of  their  money,  which  is  employed  in  discounting  bills, 
or  in  loans  to  the  more  industrious  part  of  the  community.  The 
bankers,  too,  employ  large  capital  on  the  same  objects.  The  capital 
so  employed  forms  a  circulating  capital  of  a  large  amount,  and  is 
employed,  in  larger  or  smaller  proportions,  by  all  the  different 
trades  of  the  country.  There  is  perhaps  no  manufacturer,  however 
rich,  who  limits  his  business  to  the  extent  that  his  funds  will  allow ; 
he  has  always  some  portion  of  this  floating  capital,  increasing  or 
diminishing  according  to  the  activity  of  the  demand  for  his  commodi- 
ties. When  the  demand  for  silk  increases,  and  that  for  cloth  dimin- 
ishes, the  clothier  does  not  remove  with  his  capital  to  the  silk  trade ; 
but  he  dismisses  some  of  his  workmen,  he  discontinues  his  demand 
for  loans  from  bankers  and  moneyed  men,  while  the  case  of  the  silk 
manufacturer  is  the  reverse :  he  wishes  to  employ  more  workmen, 
and  thus  his  motive  for  borrowing  is  increased ;  he  borrows  more, 
and  thus  capital  is  transferred  from  one  employment  to  another, 
without  the  necessity  of  a  manufacturer  discontinuing  his  usual 
occupation."  ^ 

Bagehot,  like  Ricardo,  oblivious  of  the  prevailing  confusion 
of  private  with  social  capital,  declares  that  capital  includes 
"  two  unlike  sorts  of  commodities,  cooperative  things  which  help 
labor,  and  remunerative  things  which  pay  for  it;  "^  and  further, 
still  in  full  conformity  with  Ricardo,  remarks : 

"  Suppose  the  corn  trade  to  become  particularly  good,  there  are 
immediately  twice  the  usual  number  of  corn  bills  in  the  bill  brokers' 
cases ;  and  if  of  the  iron  trades,  then  of  iron  bills.  You  could  almost 
see  the  change  of  capital  if  you  could  look  into  the  bill  cases  at 
different  times."  ^ 

But  note  that  Bagehot  does  not  make  it  altogether  clear  whose 
is  the  capital  that  is  changing ;  but  it  is  perhaps  fairly  to  be  assumed 
that  he  takes  it  to  be  the  capital  of  the  lenders. 

Cairnes's  statement  upon  this  point  is  hardly  more  satisfactory ; 
but  the  loan  fund  variety  of  capital  receives  equally  distinct  rec- 
ognition : 

'  Ricardo,  Political  Economy,  Gonner's  edition,  Chap.  IV,  Sec.  29. 
^  Economic  Studies,  2d  ed.,  p.  55. 
^  Bagehot,  op.  cit.,  p.  45. 


346  THE  ECONOMICS  OF  ENTERPRISE 

"  The  existence  of  a  large  amount  of  capital  in  commercial 
countries  in  disposable  form,  or,  to  speak  less  equivocally,  in  the 
form  of  money  or  other  purchasing  power,  capable  of  being  turned 
to  any  purpose  required,  is  a  i)atent  and  undeniable  fact.  Nor 
is  it  less  certain  that  this  capital  is  constantly  seeking  the  best 
investments,  and  rajiidly  moves  towards  any  branch  of  industry 
that  happens  at  the  moment  to  offer  special  attractions."  ^-^ 

Whence  come  these  sums  that  Ricardo's  manufacturer  is  borrow- 
ing from  the  moneyed  class?  It  is  a  commonplace  that  capital 
comes  from  saving ;  and  it  is  unfortunately  almost  as  much  of  a 
commonplace  that  savings  are  in  the  same  sense  capital.  But, 
as  we  have  seen,  private  saving  is  merely  the  indi\ddual  postpone- 
ment of  the  consumable  serAices  of  private  wealth ;  the  people  who 
save,  the  people  whose  steady  streams  of  contribution  flow  into  the 
loan  market,  are  ordinarily  merely  receivers  of  income,  who,  having 
held  their  expenditures  below  their  receipts,  have  something  to 
lend.  Their  decision  to  postpone  their  personal  exercise  of  their 
rights  of  consumption  is  carried  into  effect,  either  by  the  method 
of  holding  their  purchasing  power  in  hand  in  the  form  of  money, 
or  by  transferring  this  power  to  other  persons  by  some  direct  or 
indirect  method  of  loan.  The  borrower,  whether  for  purposes 
of  consumption  or  for  purposes  of  production,  desires  to  obtain 
disposal  over  this  purchasing  power.  It  is  only  as  a  question  of 
securit}'  that  it  at  all  matters  to  the  lender  whether  consumption 
goods  or  raw  material  or  machinery  or  labor  be  the  purchased  fact. 

Loan  contracts  versus  rental  contracts.  —  But  why  do  lending 
and  borrowing  actually  take  place  in  terms  of  money  loans  and  under 
the  interest  contract  rather  than  in  terms  of  the  loan  of  things  under 
the  renting  contract  (bailment)?  In  some  part  this  is  doubtless 
due  to  the  difficulty  of  determining  precisely,  and  of  estimating 
accurately'',  the  condition  of  the  goods  when  rented,  and  in  formu- 

1  Caimes,  Leading  Principles,  p.  63. 

^  "Every  one  is  aware  that  England  has  much  more  immedi- 
ately disposable  and  ready  cash  than  any  other  country.  But 
very  few  persons  are  aware  how  much  greater  the  ready  balance 
—  the  floating  loan  fund,  which  can  be  lent  to  any  one  for  any 
purpose  —  is  in  England  than  it  is  anywhere  else  in  the  world.  A 
very  few  figures  will  show  how  large  the  London  loan  fund  is,  and 
how  much  greater  it  is  than  any  other.  The  known  deposits  — 
the  deposits  of  banks  which  publish  their  accounts  —  are :  in 
London  (December  31,  1872),  £120,000,000;  in  Paris  (February 
27,  1873),.  £13,000,000  ;  in  New  York  (February,  1873),  £40,000,000; 
in  German  Empire  (January  31,   1873),  £8,000,000;  and  the  un- 


LOAN  FUND  CAPITAL  347 

lating  a  contract  adapted  to  fixing  the  treatment  which  the  rented 
good  shall  receive  from  the  borrower  or  the  condition  in  which  it 
shall  be  returned;  or,  again,  of  determining  accurately  how  far 
the  contract  has  fallen  short  of  fulfillment.  In  even  larger  degree 
the  preference  for  the  contract  for  the  loan  of  money  and  the 
payment  of  interest  is  to  be  explained  by  that  lack  of  coincidence 
of  demands  which  has  already  been  examined  with  reference  to 
barter.  The  manufacturing  entrepreneur  or  the  railroad  contractor 
wants  ordinarily  something  else  than  the  precise  goods  which  the 
lender  can  deliver.  Money  will  precisely  serve  the  need  when 
nothing  else  will.  It  is  as  a  commodity  of  general  acceptability 
that  money  most  easily  finds  lenders  and  borrowers. 

Failures  in  coincidence.  —  But  more  commonly  the  difficulty  is  of 
still  another  sort :  if  A  has  for  rent  or  for  sale  the  thing  which  B  wants  to 
borrow  or  buy,  and  B  has  in  hand  or  in  prospect  the  thing  desired 
by  A  in  which  to  make  or  to  promise  payment,  and  if,  in  addition, 
A  and  B  chance  to  come  together,  a  failure  in  the  coincidence  of 
desires  is  still  likely ;  the  credit  of  B  may  not  be  sufficiently  well 
known  to  A,  or  may  be  otherwise  unsatisfactory.  So,  without 
some  credit  intermediary  or  guarantor,  the  contract  may  not  close. 

For  many  reasons,  then,  the  practicable  method  for  the  entre- 
preneur is  to  buy  rather  than  to  rent,  even  where  the  subject  matter 
of  the  relation  might  make  renting  possible.  The  competitions 
of  entrepreneurs  center  in  the  borrowing  of  funds  with  which  to 
carry  on  business  operations  in  general,  inclusive  of  the  buying 
of  things. 

Funds  both  from  savings  and  banking.  —  Whence,  then,  come 
these  funds  that  are  borrowed  ?  Unquestionably  some  of  them 
come  from  those  who  prefer  to  invest  rather  than  to  spend. 
In  this  sense,  as  we  shall  later  more  fully  see,  there  is  a  savings 
contribution  to  the  supply  of  funds.  But  in  any  case,  such 
funds  as  are  saved  are  likely  to  be  deposited  with  commercial 

known  deposits  —  deposits  in  banks  which  do  not  publish  their 
accounts  —  are  in  London  much  greater  than  those  in  any  other 
of  these  cities.  The  bankers'  deposits  of  London  are  many  times 
greater  than  those  of  any  other  country."  —  Bagehot,  Lombard 
Street,  Chap.  I,  p.  4. 

A  well-informed  estimate  in  1895  placed  the  bank  deposits  of 
Great  Britain  at  £700,000,000.  In  the  United  States  at  present 
(1913)  the  deposit  liabilities  of  the  national  banks  alone  run  up- 
wards of  six  biUions  of  dollars. 


318  77//;  ECONOMICS  OF  ENTERPRISE 

banks  or  s:ivii\<2;s  hanks  or  insnran('(>  companies,  —  inter- 
mediate (TcHlit  institutions  acting  in  such  cases  as  guarantors 
or  underwriters  of  debts.  Borrowers,  in  turn,  mostly  apply 
to  credit  institutions  for  credit  accommodation. 

But  the  function  of  the  banks  is  much  more  largely  in 
supplying  funds  of  their  own  creation  than  as  acting  as  the 
lenders  of  the  funds  of  others.  It  is  clear  that  banks  create 
currency  by  issuing  credit,  and  that  not  merely  is  this 
function  of  issue  —  this  creation  of  exchange  media  —  a 
bringing  into  existence  of  currency  available  for  the  purposes 
of  the  borrowers,  but  also  that,  like  other  currency,  it  passes 
from  hand  to  hand  as  purchasing  power  and  as  means  of 
payment.  It  may  well  be  true  —  it  will,  indeed,  later  be 
emphasized  —  that  in  ultimate  effect  the  banker,  in  the 
ordinary  discount  relation,  is  a  guarantor  of  the  borrower's 
credit ;  but  it  suffices  for  the  immediate  need  to  point  out 
that  the  result  of  bank  lending  is  to  expand  the  quantity 
of  circulating  medium,  the  currency  available  for  loans. 
When  the  bank  lends  $1000  to  a  customer,  or  discounts 
SI 000  of  paper  offered  by  him,  it  really  gives  its  own  promise 
to  pay  ^1000  on  demand  in  exchange  for  a  time  promise 
given  to  it  by  him  to  pay  an  approximately  equal  sum.  The 
outcome  of  this  exchange  of  promises  is  an  enlargement  of 
the  supply  of  media  of  exchange.  The  credit  granted 
becomes  forthwith  a  circulating  credit,  as  efficient  as  actual 
money  for  the  processes  of  exchange.  The  methods  peculiar 
to  banking  enable  one  dollar  of  reserves  to  support  several 
dollars  of  credit  media  appropriate  to  the  loan  fund  service. 
The  supply  of  this  loan  fund  form  of  capital  is  thus  more 
largely  a  question  of  the  organization  of  banking  and  of  the 
degree  of  banking  activity  than  a  question  of  the  w^ealth  of 
society.  Banks  are  the  principal  creators  and  the  principal 
custodians  of  loan  fund  capital.  Thus  the  banking  centers 
are  the  great  capital  centers.  Easy  banking  conditions  mean 
easy  funds.  If  loanable  capital  were  the  expression  of  the 
wealth  of  society  or  of  its  possessions  of  social  capital,  it 
would  be  impossible  to  explain  the  fact  that  in  the  last  fifteen 
years  the  deposits  of  the  national  banks  alone  in  the  United 


LOAN  FUND  CAPITAL  349 

These  funds  may,  a  few  years  hence,  be  half  as  great  or, 
possibly,  twice  as  great,  without  implying  any  slightest 
corresponding  change  in  the  total  volume  of  existing  social 
wealth.  Bank  funds  do,  in  fact,  change  greatly  from  season 
to  season ;  but  there  is  no  reason  to  suspect  that  concrete 
capital  is  undergoing  any  similar  change  in  volume.  In 
fact,  also,  the  loans  of  banks  are  sought  and  granted  in  large 
part  for  the  financing  of  production  which  is  later  to  take 
place.  The  deposit  credits  derived  from  these  loans  expand 
and  contract  in  conformity  with  the  volume  of  forthcoming 
product  rather  than  with  the  volume  of  existing  wealth. 

It  must  no  doubt  be  admitted  —  it  is,  indeed,  to  be  asserted 
and  emphasized  —  that  the  banks  do  sometimes  expand  and 
sometimes  contract  the  volume  of  circulating  media.  If, 
then,  it  be  objected  that  there  is  nothing  in  their  activity 
which  tends  to  increase  the  supply  of  present  wealth  for  sale 
against  future  wealth  —  that  because  the  banks  do  not 
affect  the  volume  of  social  wealth,  their  extensions  of  credit 
must  be  merely  a  redistribution  of  purchasing  power  in 
society  and  not  an  increase  either  of  it  or  of  the  goods  to 
be  purchased  with  it  —  that  the  working  of  their  expansions 
of  currency  must  in  the  long  run  be  effective,  not  to  change 
the  total  volume  of  purchasing  power  in  society,  but  only 
to  change  the  volume  of  units,  and  therefore  the  purchasing 
power  of  each  unit,  the  final  effect  being  solely  upon  the 
level  of  prices  rather  than  upon  the  rate  of  interest  —  all 
this  may  readily  be  admitted  without  menace  to  the  argu- 
ment. It  remains  true  that  the  activity  of  the  banks  in 
modifying  the  supply  of  loan  fund  is  always  a  controlling 
influence  in  fixing  or  in  modifying  the  interest  rate  of  any 
particular  time.^ 

1  Banking  and  Interest. 

The  long-time  effects  of  banking  upon  the  interest  rate  are  not 
a  part  of  the  present  problem,  but  are  nevertheless  questions 
both  of  great  importance  and  of  great  diffieulty.  Why  should 
not  the  effect  of  the  expansion  of  currency  by  the  bankers  be 
precisely  the  same  as  the  effect  of  any  other  inflation  of  the  cur- 
rency, viz.  (1)  easier  loans  and  lower  discount  rates,  followed  by 
(2)  rising  prices  and  stimulated  demand  from  borrowers,  neces- 
sitating (3)  a  recovery  in  discount  rates  possibly  extending  even 


350  THE  ECONOMICS  OF  ENTERPRISE 

We  have  seen  that  the  thing  loaned  in  the  interest  relation 
is  money,  or  other  purchasing  power  interchangeable  with 
money ;  that  uitcrest  is  a  ])roniiinn  for  ])resent  dollars  over 
future  dollars  ;  that  the  jiroblem  of  the  fixation  of  tlic  rate  is 
merely  one  more  problem  in  the  mechanics  of  price  fixation  — 
the  only  aspect  in  which  the  interest  problem  is  peculiar  being 

beyond  the  original  level,  and  resulting  finally  in  (4)  the  old  level 
of  interest  at  a  higher  level  of  prices. 

There  appear,  however,  to  be  differences  between  the  working 
of  credit  expansion  and  of  money  expansion.  Credit  expansion, 
initiated  by  the  banks  themselves  rather  than  by  the  original  stimu- 
lus of  expanding  supplies  of  reserves,  takes  place  only  on  terms  of 
an  increasing  pressure  upon  the  banking  reserves  and  on  terms  or 
a  tendency  toward  progressively  higher  discount  rates  for  these 
bankers'  services  in  the  underwriting  of  credit.  In  other  words, 
the  increase  in  the  current  circulating  medium,  as  more  and  more 
future  paying  power  is  being  transferred  by  the  banks  into  present 
and  current  paying  power,  takes  place  on  terms  of  the  increasing 
resistance  of  hardening  bank  rates  —  higher  premiums  for  present 
funds  as  against  future  funds.  The  funds  derived  from  these  dis- 
count transactions  function  as  currency  to  be  loaned  by  the  bank 
depositor  or  to  be  used  in  the  purchase  of  goods.  Prices  tend  to 
rise,  to  be  sure,  but  only  under  the  increasing  opposition  of 
higher  interest  rates.  The  loan  fund  is  expanding,  but  is  ex- 
panding as  a  result  of  a  process  which  carries  with  it  higher 
interest  charges. 

It  must  be  admitted,  however,  that  the  foregoing  may  well 
be  a  faulty  anah'sis.  The  precise  relations  of  banking  to  the  long- 
time average  of  interest  rates,  and  therewith  to  the  long-time  aver- 
age of  prices,  are  problems  of  infinite  difficulty  and  perplexity. 
Of  only  so  much  as  this  —  which  is  enough  for  the  present  purpose 
—  is  the  present  WTiter  confident :  that  the  problem  of  the  supply 
of  loan  fund  and  of  the  interest  rates  paid  for  loans  is,  for  any  given 
time  and  situation,  rather  a  banking  problem,  a  question  of  the 
volume  of  circulating  medium  and  the  uses  for  which  it  is  offered, 
than  a  question  of  the  aggregate  wealth  of  society,  of  the  source 
or  nature  of  it,  or  of  the  abstinences  conditioning  the  existence  of 
any  part  of  it.  Long-time  equilibria  are  no  part  of  the  prob- 
lem of  the  current  supply  of  funds  or  of  the  cuiTent  interest 
rates. 

Likewise  it  cannot  greatly  matter  w^hether  the  following  analysis 
of  the  relations  between  banking  and  the  long-time  levels  of  interest 
is  or  is  not  accurate ;  it  is  merely  offered  by  the  way  as  the  best 
that  the  present  writer  can  at  present  accomplish : 


LOAN  FUND  CAPITAL  351 

the  fact  that  the  equating  point  between  the  demand  and 
supply  schedules  is  a  rate  per  cent ;  that  therefore  the  analysis 
of  interest  leads  back  to  an  examination  of  the  precise  thing 
that  is  lent  for  interest  and  to  an  examination  of  the  influences 
lying  behind  the  demand  for  it  and  the  supply  of  it ;  that  the 
supply  of  loan  fund  is  merely  the  supply  of  present  purchas- 
ing power  available  for  lending ;  that  this  loan  fund  is  there- 
Banking  is  essentially  an  underwriting  of  credit.  The  customer 
of  the  bank  becomes  a  debtor  to  it  in  order  to  obtain  with  it  an 
immediate  credit  which  he  can  use  as  current  buying  or  paying 
power.  He  exchanges  obligations  with  the  bank.  He  owes  it 
in  order  that  he  may  be  able,  by  assigning  his  right  against  it,  to 
be  the  debtor  of  it  rather  than  a  debtor  to  another  — •  to  substitute 
it  as  debtor  for  himself  as  debtor.  Essentially  the  bank  takes 
his  liability  upon  itself  on  terms  of  his  becoming  separately  liable 
to  it.  In  point  of  form,  doubtless,  the  bank  does  not  precisely 
become  his  surety  or  make  itself  a  guarantor  of  his  promise,  but 
essentially  it  does  exactly  this ;  it  assumes  his  debts  on  terms  of 
his  becoming  indebted  to  it.  Thus  he  ceases  to  pay  interest  to 
other  creditors  and  pays  interest  to  the  bank  instead  as  his  creditor. 
It  has  intimate  knowledge  of  his  business  affairs  and  accepts  the 
risk  of  his  solvency  —  a  risk  which  others  will  either  not  accept 
at  all,  or  will    accept  on  less  favorable  terms. 

And  incidentally  the  bank  does  more  than  this :  it  transforms 
the  future  paying  power  of  its  customer  into  present  current  paying 
power.  This  is  the  function  of  reserves.  Based  upon  these  it  is 
able  to  promise  that  it  will  pay  actual  money  in  those  exceptional 
cases  where  actual  money  is  called  for.  For  each  dollar  of  bank 
reserves  the  banks  are  able  to  transform,  say,  $4  of  customers' 
probable  future  paying  power  into  an  equal  sum  of  effective  pres- 
ent paying  power. 

But  note  that  these  reserves  do  not  mean  that  the  bank  expects 
to  pay  in  money  or  will  have  to  pay,  but  only  that  it  will  be  ready 
if  it  be  called  upon.  Ordinarily  it  is  not  so  called  upon.  Actually 
most  of  its  obligations  represented  in  its  deposit  liability,  and  the 
average  of  these,  are  long-time  obligations.  Commonly  they  come 
be  canceled  neither  earlier  nor  later  in  money,  but  only  by  the 
debtor  presenting  them  to  be  set  off  against  his  note  for  the  cancel- 
ing of  it. 

In  substance,  then,  the  discount  charge  of  the  bank  is  an  insur- 
ance premium  for  the  danger  of  loss  which  it  accepts  in  substituting 
itself  as  debtor  in  place  of  the  borrower  and  in  undertaking,  if 
necessary,  to  pay  on  demand  in  his  stead.  If  his  obligation  to 
it  is  also  to  pay  on  demand,  the  premium  rate  is  likely  to  be 
a  low  one.     If  he  is  privileged  to  delay,  the  while  that  the  bank 


352  THE  ECONOMICS  OF  ENTERPRISE 

fore  made  up  exclusively  of  rights  of  purchase  —  rights  of 
control  or  direction  of  men  and  of  wealth ;  that  its  existence 
implies  nothing  as  to  its  origin  or  as  to  the  manner  or  method 
of  its  a('(|uirement ;  that  as  the  banks  create  it  by  the  exercise 
of  their  guarantee  function,  so  other  men  may  extort  or  steal 
it ;  or  it  may  arise  through  the  legislative  gift  to  one  man  of 
enforceable  rights  against  other  men ;  or  the  possessor  may 
have  obtained  it  by  ruse  or  guile  —  it  mattering  for  the  pur- 
pose only  that  it  exists  and  is  transferable  to  borrowers ; 
that  the  loan  fund,  as  made  up  of  income-earning  possessions, 
is  capital,  but  a  peculiar  kind  of  capital,  one  among  many 
varieties,  and  entirely  distinct  from  durable  production  on 
durable  consmnption  goods  or  from  the  raw  materials  of  in- 
takes the  risk  of  not  being  permitted  to  delay,  the  premium  is 
higher. 

It  being,  then,  established  that  the  discount  rates  of  banks  are 
a  compound  of  (1)  risk  charges  against  possible  bad  loans  (specific 
mortalitj^  hazards),  (2)  overhead  and  general  charges  for  the  risks 
of  stress  or  crisis  (conflagration  or  epidemic  hazards),  (3)  charges 
for  the  cost  of  maintaining  reserves  and  for  the  general  expenses 
of  administration  (expense  loading)  —  it  should  follow  that  bank- 
ing can  have  no  very  important  bearing  on  the  long-time  level  of 
interest  rates.  The  banks  serve  as  mere  intermediaries  between 
the  debtor  class  and  the  creditor  class.  As  incidental  to  their 
function  of  suretyship  —  of  the  underwriting  of  credit  —  they 
provide  a  circulating  medium  and  thereby  affect  the  general  level 
of  prices.  In  the  long  run  their  acti"vity  will  mostly  exhaust  itself 
in  this  modification  of  prices. 

Some  effect,  however,  there  is  in  banking  to  lower  the  interest 
rate  —  the  gross  rate,  the  rate  inclusive  of  the  risk  charge.  This 
effect  is,  indeed,  implied  in  the  very  nature  of  the  banking  func- 
tion, the  underwriting  of  credit  risks.  That  the  performance  of 
the  intermediate  function  makes  possible  a  larger  number  of  credit 
relations  through  bringing  together  more  lenders  and  borrov,'ers, 
does  not  involve  the  necessity'  of  a  change  in  the  rates  of  interest 
paid.  It  is  in  the  diminishing  costs  of  the  carrying  of  the  credit 
risks  that  the  banks  are  able  to  make  the  interest  rate  lower.  Gains 
in  the  business  of  insuring  credits  arise  by  the  fact  that  the  insurer 
is  able  to  carry  risks  more  cheaply  than  the  individual  lender  can 
carry  them.  The  gain  is  a  differential  between  the  cost  of  the  risk 
and  the  market  compensation  allowed  for  carrying  it.  Only  in 
respect,  then,  of  diminishing  the  risk  element  of  the  rate  —  but 
very  clearly  in  this  respect  —  has  banking  any  influence  to  lower 
the  long-time  market  rates  for  loans. 


LOAN  FUND  CAPITAL  353 

dustry  —  a  kind  of  capital  also  that  has  no  direct  dependence 
on  the  supply  of  production  goods  or  of  other  concrete  wealth 
in  society,  or  even  any  necessary  relation  to  any  of  them ; 
but  that  this  loan-fund  subdivision  of  capital  is  the  only 
capital  known  to  the  distinctly  financial  world,  the  thing 
that  is  lent  and  borrowed  in  the  capital  markets,  and  the 
thing  which,  in  getting  transferred  from  lender  to  borrower, 
fixes  the  rate,  or  rates,  of  interest  with  which  the  business 
world  is  familiar ;  and  that  the  main  business  of  banking  is  in 
the  creating  or  the  lending  of  it. 

Devoting  itself  especially  to  an  examination  of  interest 
theory,  the  next  chapter  will  make  clear  that  abstinence  can 
be  offered  as  an  explanation  for  interest  only  in  the  sense  of 
pointing  to  the  conditions  on  which  a  part  of  the  supply  of 
income  available  for  future  uses  depends  ;  that,  as  an  ethical 
justification  for  interest,  abstinence  is  unimportant,  and  even 
irrelevant ;  that  no  matter  from  what  source  or  by  what 
method  the  incomes  may  have  been  gained,  the  question 
of  abstinence  has  solely  to  do  with  what  present  disposition 
shall  be  made  of  the  incomes ;  that  abstinence  is  in  no  case 
a  fact  of  pain ;  and  that  even  if  in  all  cases,  or  in  any,  it 
were  a  pain,  the  abstinences  of  different  men  could  not  be 
reduced  to  any  common  denominator  of  pain,  with  the  units 
of  which  the  units  of  interest  income  could  be  made  propor- 
tional. 

It  will  also  appear  that,  since  the  interest  contract  is  always 
a  contract  for  the  deferred  payment  of  money,  interest  must 
express  the  market  rates  of  premium  for  the  present  funds 
offered  by  lenders  over  the  future  funds  promised  by 
borrowers ;  that  all  influences  —  banking  as  well  as  absti- 
nence —  increasing  or  limiting  the  supply  of  fmids  for  loan 
must  be  considered  on  the  supply  side  of  the  case ;  that  all 
the  various  opportunities  and  inducements  to  borrowing 
must  be  considered  on  the  demand  side  —  agriculture,  manu- 
facturing, merchandising,  speculation,  wise  consumption 
loans,  unwise  consumption  loans,  the  purchase  or  hiring  of 
long-time  production  or  of  long-time  consumption  goods,  the 
financing  of  enterprises  of  predation  or  of  other  harm,  as  well 
as  enterprises  of  social  service  —  adulterated  goods  equally 
with  wholesome  products,  scandal  equally  with  news,  cut- 
throat competition  equally  with  wholesome  rivalry,  pur- 
chased legislative  favor  equally  with  up-to-date  equipment. 
2a 


354  THE  ECONOMICS  OF  ENTERPRISE 

Every  prosi^ect  of  ^am  from  borrowed  fimds  affords  an  in- 
centive for  borrowine;  them.  Incidentally  the  social-organ- 
ism method  of  cxplaming  mterest  rates  will  come  m  for 
some  discussion ;  so  also  of  the  relation  of  existmg  valu- 
able properties  to  the  demand  for  funds. 


CHAPTER  XIX 

THE   LOAN   RATE  :     INTEREST 

Production,  exchange,  and  currency.  —  In  view  of  the 
work  that  is  done  in  the  home  by  members  of  the  family, 
and  of  the  products  that  are  directly  consumed  by  the  pro- 
ducers of  them,  it  will  not  do  to  assert  that  all  goods  in  the 
present  society  are  produced  for  sale,  but  only  that,  in  the 
competitive  order,  production  for  sale  is  the  characteristic 
fact  of  that  order  and  the  fact  about  which  most  economic 
problems  center.  More  and  more  the  baking,  the  laundering, 
and  the  making  of  fabrics  and  garments  are  coming  to  be 
done  outside  the  household.  The  field  of  exchange  and  of 
production  for  exchange  grows  constantly  wider.  The 
modern  economy  is  prevailingly  the  exchange  economy. 

Incomes,  a  monetary  (currency)  movement.  —  It  is  ob- 
vious that  an  exchange  economy  means  that  each  individ- 
ual is  producing  some  commodity,  or  performing  some 
present  service,  or  contriving  some  scheme  or  project,  by 
which  money  (more  accurately,  currency)  shall  be  obtained 
by  him,  to  the  end  that  in  turn,  he  may  have  it  to  pay  out 
in  the  furthering  of  his  purposes.  Thus  for  each  individual 
and  for  individuals  in  the  aggregate  it  is  possible  to  regard 
the  economic  process  as  one  of  a  constant  circulation  of  money 
—  all  incomes  arriving  in  money  terms  and  all  expenditure 
of  income  taking  place  in  money  terms.  While  each  indi- 
vidual is  doing  that  thing  which  will  best  gain  him  money, 
and  gains  the  money  by  doing  that  thing,  it  is  still  true 
that  what  thing  will  best  gain  him  money  depends  on  what  the 
possessors  of  money  are  disposed  to  pay  him  for.  This 
statement  is  merely  another  way  of  saying  that  it  is  every- 
where demand  that  gives  direction  to  supply.  Each  indi- 
vidual does  what  another  will  give  up  money  for.     Each 

355 


35G  THE  ECONOMICS  OF  ENTERPRISE 

recipient  of  money  is  in  turn  in  position  to  determine  what 
some  one  else  shall  (k)  or  how  he  shall  employ  his  possessions. 

Loans  a  temporary  modification  of  the  money  flow.  — 
The  usual  process  of  lending  is,  then,  merely  one  of  sub- 
tracting from  one  man's  store  of  cash  resources  and  of  adding 
to  the  store  of  another.  This  substitution  of  control  may, 
it  is  true,  take  place  through  the  transfer  of  some  item  of 
property  controlling  a  stream  of  money  income  or  exempting 
the  holder  from  the  necessity  of  paying  out  money.  In 
other  words,  the  renting  contract  is  always  possible.  More 
commonly,  however,  the  transfer  is  a  transfer  of  money  or 
of  other  purchasing  power  as  substitute  for  money.  Such 
cases  present  the  deferred  payment  relation  and  the  interest 
contract.  The  interest  problem,  therefore,  is  the  problem 
of  explaining  the  terms  of  price  payment,  the  rate  per  dollar 
per  period,  on  which  these  transfers  of  purchasing  power  are 
made. 

Interest  paid  to  modify  the  money  flow.  —  Such  payments 
are  evidently  made  for  the  privilege  of  earlier  as  against 
later  command  of  purchasing  power  —  some  of  them  with 
the  purpose  of  buying  or  hiring  instrumental  goods  or  fran- 
chises or  patents,  or  of  obtaining  raw  materials  in  the  pro- 
ductive process ;  others  for  speculative  operations ;  others 
for  the  purchase  of  long-time  consumption  goods;  others, 
again,  for  the  purchase  of  immediate  consumption  goods; 
still  others  for  the  discharge  of  accruing  money  obligations. 
But  in  any  case  interest  is  the  payment  for  the  right  to 
have  or  to  use  earlier  rather  than  later. 

Sources  of  circulating  media  :  Rates  and  prices.  —  From 
whom  shall  these  rights  be  obtained?  Obviously  from  those 
who  have  them  —  from  the  saver  rather  than  from  the 
spender,  but  equally  obviously  from  those  who  can  create 
them  at  will  —  the  bankers  —  and  from  those  who,  through 
the  bankers,  are  able  to  transform  a  prospective  paying  power 
into  a  present  paying  or  purchasing  power.  For  note  that 
this  circulation  of  purchasing  power  which  we  have  just 
analyzed,  and  the  transferring  of  it  in  loans,  must  take 
account  of  the  fact  that,  through  the  bankers,  contributing 
streams  of  purchasing  power  are  being  injected  into  the  gen- 


THE  LOAN  RATE:    INTEREST  357 

eral  circulation  of  currency,  and  that  these  banking  con- 
tributions vary  greatly  in  volume  with  different  times,  and 
vary  also  in  the  charges  on  which  they  are  to  be  had.  Some- 
times, that  is,  prospective  paying  power  functions  as  a  greater 
and  sometimes  as  a  smaller  share  in  the  total  of  present  paying 
power,  —  circulating  media,  currency.  When  the  banks 
are  creating  currency  generously  for  their  customers,  money 
is  easy,  the  loan  fund  ample,  and  prices  are  rising  or  making 
ready  to  rise.  When  the  banks  are  niggardly  of  credit  ac- 
commodations, interest  rates  advance  with  the  short  sup- 
plies of  banking  currency  and  of  exchange  media  generally. 
Acute  contractions  of  banking  credit  so  far  restrict  the 
offer  of  prospective  income  as  immediate  purchasing  power, 
and  so  far  reduce  the  fund  of  deposit  credits,  and  so  far  raise 
the  rates  upon  loan  capital  as  to  force  many  holders  of 
property  to  make  choice  between  selling  at  great  sacrifice 
and  holding  at  continuing  loss,  as  to  compel  debtors  to  renew 
their  obligations,  if  they  can,  on  increasingly  burdensome 
terms,  and  as  to  subject  many  business  men  to  the  necessity 
of  seeking  accommodation  at  whatever  rates  they  can  get 
it  in  the  frantic  attempt  to  escape  insolvency. 

Classical  abstinence.  —  In  view  of  the  foregoing,  the 
attempt  of  the  classical  economists  to  explain  the  supply 
of  loanable  capital  as  dependent  solely  upon  the  abstinence 
of  lenders,  'and  to  interpret  interest  as  a  rate  of  return  fixed 
as  the  equating  point  between  the  pains  of  saving,  on  the 
side  of  supply,  and  the  gain  or  advantage  of  borrowers, 
on  the  side  of  demand,  falls  little  short  of  the  grotesque. 
Still  greater  is  the  absurdity  when  the  demand  for  funds  is 
interpreted  to  indicate  or  measure  the  social  productivity  of 
capital. 

There  is,  however,  truth  in  the  abstinence  theory  of  interest 
only  that  it  is  but  a  part  of  the  truth,  and  is  at  the  same 
time  an  exceedingly  unfortunate  way  of  expressing  that  part. 
Men  who  have  purchasing  power  in  hand  are  evidently  able 
to  spend  it  or  to  invest  it.  If  they  lend  it  to  others,  they 
get  pay  for  the  lending  —  for  foregoing  or  displacing  some 
alternative  employment,  whether  in  spending  or  investing. 
If  this  is  all  there  is  in  the  abstinence  theory  of  interest, 


358  THE  ECONOMICS  OF  ENTERPRISE 

it  is  so  far  axiomatic.  And  equally  beyond  question  is  it 
that  the  degree  in  which  receivers  of  income  are  content 
to  forego  the  spending  of  it  has  something  to  say  as  to  the 
amount  of  current  income  which  is  available  for  purposes 
of  lending  —  only  that  it  has  not  everything  to  say. 

Such  truth,  then,  as  there  is  in  the  waiting  or  abstinence 
theory  of  interest  rests  merely  in  the  obvious  fact  that  who- 
ever has  present  wealth  or  present  income  has  his  choice 
between  using  it  for  purposes  of  immediate  consumption, 
spending  it,  and  applying  it  in  one  way  or  another  to  future 
uses,  investing  it.  In  order  to  hold  these  alternatives  clearly 
in  mind  and  to  avoid  the  misleading  connotations,  spending 
and  investing  \vill  be  understood  as  contrasted  terms.  Spend- 
ing means  using  for  immediate  needs.  Investing  must, 
therefore,  include  all  outlays  for  durable  production  goods, 
e.g.,  farm  machinery,  and  for  all  business  outlays  in  general, 
and  all  outlays  for  durable  consumption  goods,  e.g.,  houses, 
pianos,  and  automobiles,  and  as  well  all  cases  of  lending. 
To  retain  a  property  which  one  already  has,  rather  than  to 
sell  it  and  spend  the  proceeds,  is  a  choice  in  favor  of  the 
investment  alternative. 

Origins  —  labor  or  abstinence  —  irrelevant.  —  It  is,  then, 
clear  that  this  decision  whether  to  spend  or  to  invest  has 
nothing  to  do  with  the  origin  of  the  property.  Much  of 
the  existing  capital,  social  as  well  as  private,  never  had  any 
labor  or  expense  as  the  condition  to  its  existence.  Lands, 
waterfalls,  and  all  forms  of  natural  bounty  do  not  owe 
their  origin  to  human  effort.  Equally  obvious  is  it  that 
much  capital  does  not  owe  its  continued  existence  to  any 
sort  of  saving  or  providence  or  abstinence.  No  one  can 
either  produce  or  consume  the  waterfalls  or  the  water  fronts, 
or  the  city  lots.  Still  other  capital  that  is  purely  private, 
e.g.,  patents  and  franchises,  as  they  need  not  have  been  con- 
ditioned in  origin  upon  labor  or  expense,  are  not  conditioned 
upon  any  restraint  or  saving  or  abstinence  for  their  contin- 
uance. Labor  as  explanation  of  the  origin  of  capital  and 
abstinence  as  explanation  of  its  continued  existence  are 
equally  inadequate  doctrines.  Waiting  which  took  place 
in  the  past  has  nothing  to  do  with  the  present  situation 


THE  LOAN  RATE:    INTEREST  359 

excepting  in  so  far  as  this  waiting  may  or  may  not  explain 
what  there  is  now  in  existence  to  save  or  to  spend.  In 
point  of  fact,  also,  any  particular  holder  of  any  particular 
item  of  income  or  of  capital  may  have  obtained  it  by  gift, 
by  inheritance,  by  legislative  grant,  by  speculation,  by  theft, 
or  even  by  highway  robbery.  Some  of  this  capital,  indeed, 
legislative  favor  may  have  created  de  novo,  e.g.,  tariff  privi- 
leges, franchises,  patents,  monopolies.  It  being,  however, 
entirely  clear  that  the  origins  of  income  and  of  capital  have 
little  to  do  with  the  rates  of  interest  that  are  to  be  had  for 
them,  it  cannot  greatly  matter  whether  there  is  much  or 
little  truth  in  the  labor  theory  of  the  origin  of  capital  or  in 
the  abstinence  theory  of  the  maintenance  of  capital.  Not 
where  things  came  from  but  what  can  be  had  for  them  is  the 
interest  problem. 

Thus  it  is  clear  that  there  is  some  capital  that  was  never 
produced  by  human  labor,  that  could  never  have  been  de- 
stroyed by  the  waste  or  consumption  of  human  beings,  that 
does  not  now  depend  for  its  maintenance  on  the  restraint  or 
foresight  of  anybody ;  and  that  there  is  always  a  large  volume 
of  capital  funds  for  loan  that  are  created  by  banking  activity 
as  a  present  derivative  from  expected  future  paying  power. 
Abstinence,  therefore,  as  explaining  the  supply  of  funds  for 
loan  can  mean  no  more  than  the  obvious  fact  that  whoever 
lends  abstains  from  making  some  alternative  use,  that  who- 
ever has  money  might  spend  it,  that  whoever  has  lands  might 
sell  them  or  might  cultivate  them  himself. 

But  abstinence  is  a  reality.  —  It  is,  however,  still  true  that  some 
part  of  the  funds  for  loan  in  society  is  due  to  the  choice  of  the 
possessor  to  invest  them  rather  than  to  spend  them,  and  that 
some  part  of  the  increase  in  the  supply  of  loan  fund  is  conditioned 
on  the  fact  of  saving.  The  overcoming  of  the  disposition  to  spend 
is  necessary  to  some  of  the  saving;  some  waiting  takes  place  as 
induced  by  the  pay  which  can  be  had  for  it.  Clearly,  then,  there 
is  truth  in  the  abstinence  theory  of  interest,  only,  be  it  repeated, 
it  is  not  the  whole  truth. 

How  far  waiting  is  burdensome.  —  It  is,  however,  commonly 
asserted  that  always  with  human  beings  there  is  a  disposition  to 
spend  rather  than  to  hold  —  an  indisposition  to  save,  to  wait,  to 


3G0  THE  ECOXOMICS  OF  ENTERPRISE 

postpone  the  expenditure  of  income,  to  forego  present  consumption 
in  favor  of  future  consumption. 

This  disHke  of  waiting,  this  protest  at  abstinence,  this  impatience 
fact,  is  conmionly  presented  as  the  ultimate  explanation  for  the 
limited  supplj'^  of  capital  for  loan,  for  the  necessity  of  paying  a 
premium  of  the  present  over  the  future  if  capital  is  to  be  borrowed. 
And  it  is  evident  that  the  indis]X)sition  to  wait,  the  pressure  for 
present  enjoyment,  the  impatience  of  delay,  is  a  commonplace 
fact  in  human  life.  One  dislikes  to  wait  about,  after  tlie  appointed 
tune,  for  some  careless  friend  to  fulfill  his  engagement ;  accurately, 
however,  is  this  really  the  dislike  of  delay  or  the  desire  to  do  some- 
thing else?  But  at  any  rate  there  are  many  men  who  are  spend- 
thrift of  present  resources  in  their  disregard  of  the  claims  of  the 
future  —  in  their  overemphasis  upon  the  present  end,  or  in  their 
over-response  to  the  present  desire.  Are  we  not  all  of  us  a  Uttle 
so?  Children  cry  at  ha\-ing  to  wait  for  their  cake  till  the  next 
meal,  when  they  will  he  hungrier.  Savages  are  prone. to  feast 
wastefully  to-day,  careless  of  the  probable  or  certain  dearth  of  a 
fortnight  hence.     In  varjdng  degree,  are  we  not  all  like  this? 

So  it  is  commonly  thought  and  said  —  especially  by  economists. 
And  surely  many  men  are  grossly  impro\'ident  of  health  and  wel- 
fare as  well  as  of  income.  The  far-off  need,  the  remote  dyspepsia, 
the  possible  nervous  breakdown,  the  probable  rheumatism,  the 
certain  remorse,  or  even  the  untimely  death  —  all  of  us  are  prone, 
some  of  the  time,  to  forget.  The  future  fact  we  are  not  hkely  to 
appreciate  adequately,  to  see  clearly,  to  face  fully. 

Doubtless  this  is  more  or  less  true  with  all  races  and  grades  of 
men.  And  yet  what  does  it  mean  that  so  many  men  are  so  keen 
to  die  rich,  that  so  many  others  are  founcUng  rich  families,  that  there 
is  so  much  pro^^sion  against  old  age,  so  many  of  us  hag-ridden  in 
our  fear  of  want  or  possible  penur}^  or  dependence?  Why  all  this 
piling  up  of  wealth?  Is  there  not  also  with  us  the  squirrel  urge 
toward  the  hoard  of  nuts,  the  ant-like  instinct  of  preparation 
against  the  November  winds  ?  Have  not  all  of  us  —  or  almost 
all  —  a  joy  in  the  mere  fact  of  present  pro\'ision,  a  substantive 
pleasure  in  looking  forward  to  the  time  of  enjojanent,  a  capacity 
for  experiencing  those  pleasures  of  hope  the  enchantment  of  wliich 
distance  rather  magnifies  than  diminishes?  Who  knows,  after  all, 
that  our  care  for  old  age  or  our  soUcitude  for  the  rainy  day,  the 
parental  love  for  offspring  and  descendants,  the  human  interest 
in  the  future  of  the  race,  the  recognized  privilege  and  accepted 
duty  of  conserving  the  pubhc  resources  may  not  in  the  large 
average   outweigh    the   impulse   to   present    enjoyment?      Is    it 


THE  LOAN  RATE:    INTEREST  361 

certain  that  less  saving  would  go  on  were  there  no  interest  rate? 
Might  not  the  present  premium  against  future  need  or  future 
contingencies  in  general  be  all  the  greater  if  the  earning  power  of 
a  given  fund  were  less? 

The  issue  at  its  simplest.  —  To  isolate  this  problem  and  to  place 
it  clearly  before  us,  recourse  must  be  had  to  a  more  or  kss  heroic 
abstraction :  Suppose  a  competitive  society  in  which  the  only 
productive  fact  were  labor  —  all  lands  equally  good  and  plenty  of 
them,  no  use  made  of  implements  or  of  durable  consumption  goods, 
no  occasion  for  seed  or  fertilizers,  the  wild  beasts  caught  by  running 
them  down,  the  fish  scooped  up  in  the  hands.  There  would  still 
exist  exchange  relations  among  products  —  there  might  even  be 
money  —  but  there  would  not  need  be  any  premium  in  favor  of 
present  goods  or  present  purchasing  power  as  over  against  future 
goods  or  future  purchasing  power.  There  might  or  there  might 
not  be  this  premium,  according  to  the  prevailing  psychology 
with  regard  to  provision  for  the  future.  Even  a  negative  interest  — 
a  charge  for  keeping,  a  premium  on  the  future  —  might  attach. 
The  perspective  of  time  alone  does  not,  then,  for  all  kinds  and  con- 
ditions of  men,  guarantee  an  interest  rate.  Nor  is  our  knowledge 
of  present  humanity  sufficient  to  warrant  us  in  any  opinion  about 
our  own  particular  race  or  society  in  this  regard. 

Abstinence  in  the  pain  interpretation.  —  Something,  then,  is 
the  matter  with  the  notion  that  interest  finds  its  explanation  in 
the  pains  of  abstinence  generally,  or  in  the  pains  of  marginal  absti- 
nence. 

As  a  matter  of  fact,  abstinence  is  not  necessarily  or  always  a 
pain  at  all.  For  some  people  the  pleasures  of  expectation  are  a 
reality;  and  there  are,  for  misers  at  least,  some  keen  pleasures  of 
having  and  keeping.  And  in  the  very  common  case  in  which  money 
gives  a  choice  between  two  gratifications,  one  present  and  the  other 
future,  it  would  be  a  waste  of  sympathy  to  count  as  pain  the  fact 
that  the  greater  pleasure  lies  in  the  future.  The  truth  obviously  is 
that  to  choose  between  two  present  gratifications  does  not  fall 
within  the  pain  calculus :  and  to  find  in  the  remoter  of  the  two  the 
larger  pleasure  or  service  introduces  no  new  element  of  pain.  Nor 
is  the  going  without  the  gain  of  using  your  tools  or  machinery  for 
a  year,  in  order  to  rent  them,  a  fact  of  pain.  At  the  most,  it  is  a 
foregone  pleasure.  Rental  incomes  from  land  are,  at  all  events, 
not  based  on  pains.  We  waste  no  tears  over  the  piteous  case  either 
of  the  landed  class  or  of  the  coupon  cutters. 

Nor,  in  truth,  where  the  individual  is  in  possession  of  sufficient 
money  to  buy  him  a  meal,  but  decides  to  save  his  money  and  to 


362  THE  ECONOMICS  OF  ENTERPRISE 

lend  it,  is  the  abstinence  a  pain.  It  is  only  the  hunger  that  is  pain. 
A  man  having  the  hunger  but  no  money  has  unquestionably  one 
pain  and  no  more,  that  of  hunger.  So  much  is  clear.  If  now  we 
take  this  man  to  have  both  the  hunger  and  the  money,  he  has  not 
now  two  pains,  one  of  hunger  and  one  of  abstinence,  but  only  the 
one  original  jiain  of  hunger.  His  is,  indeed,  the  fortunate  case  of 
one  who  need  have  no  pain  at  all  if  only  he  would  let  go  of  his 
money.  Perhaps  to  lose  his  money  would  be  painful,  but  only  in 
the  sense  that  it  would  involve  the  continuance  of  the  pain  of 
hunger.  But  to  lend  the  money  is  not  a  pain,  and  the  only  pain 
in  the  case  is  that  gnawing  at  his  vitals  that  he  has  declined  to  still. 
To  keep  your  money  when  you  are  hungry  is  clearly  not  a  pain, 
but  only  being  hungry.  Were  this  not  the  truth,  the  case  of  one 
having  both  the  hunger  and  the  money  would  be  the  especially 
grievous  case ;  alms  given  to  the  beggar  would  carry  with  them  the 
least  pain  when  given  just  before  meal-time ;  the  rich  who  could 
spend,  but  do  not,  would  be  the  unfortunates  of  the  world ;  the 
last  word  or  economic  philosophy  would  run,  "  Blessed  be  nothing." 
The  truth  certainly  is  that  the  man  with  the  hunger  and  the  dollar, 
who  now  stills  his  present  hunger,  will  shortly  get  hungry  again. 
The  dollar  is  merely  liis  permit  to  choose  between  two  pains  —  or 
two  pleasures — one  present  and  one  future.  If  he  had  no  doUar, 
he  would  have  to  bear  both  pains  or  go  without  both  pleasures. 
There  is  nothing  especially  touching,  then,  in  the  fact  that  he  has 
the  dollar,  and  that,  in  spending  it  now  or  later,  he  has  to  forego 
an  alternative  spending.  It  appears,  then,  that  not  only  the  neces- 
sity of  a  choice  between  pleasures  is  not  a  pain,  but  also,  and  with 
equal  certainty,  that  the  necessity  of  a  choice  between  pains  is  not 
a  pain. 

The  abstinence  doctrine,  rightly  interpreted,  a  truism.  — 

The  doctrine,  however,  which  asserts  merely  that  the  growth 
of  the  loan  fund  is  dependent  in  part  upon  the  disposition  of 
possessors  of  resources  to  retain  them  for  future  needs  rather 
than  to  spend  them  for  immediate  needs  is  true  —  to  the 
extent  of  being  a  truism.  And  it  is  true  also  that  the  amount 
of  income  saved  will  in  part  depend  upon  the  degree  of  pres- 
sure from  present  need.  All  investment  is  a  foregoing  of  a 
present  opportunity  for  consumption.  If  one  has  present 
money  (currency),  he  may  (1)  spend,  (2)  hold  for  later  spend- 
ing, (3)  buy  durable  production  goods  for  his  own  use,  (4)  or 
for  lending  to  some  one  else,  (5)  buy  durable  consumption 


THE  LOAN  RATE:    INTEREST  363 

goods  for  his  own  use,  (6)  or  for  lending  to  some  else,  or  (7) 
lend  the  money  to  some  one  else  to  be  applied  in  any  of  the 
foregoing  six  ways.  The  supply  of  loan  fund  at  any  given 
time  must  obviously  be  somewhat  affected  by  the  way  in 
which  the  possessors  of  immediate  purchasing  power  are 
disposed  to  use  it.  All  later  services  are  conditioned  on  the 
displacement  of  earlier  services.  When  one  stores  ice  against 
the  summer's  heat,  or  wood  against  the  winter's  cold,  or  food 
against  the  foodless  season,  or  wages  against  the  weeks  of 
sickness  or  the  feebleness  of  age,  the  fact  may  well  be  —  and 
commonly  is  —  that  the  future  need  outranks  the  present 
need,  pound  against  pound,  or  bushel  against  bushel,  or  dollar 
against  dollar,  without  reference  to  any  increase  in  the  objec- 
tive goods  with  lapse  of  time.  There  is  no  abstinence  or 
burden  in  the  case  in  any  other  sense  than  that  either  ap- 
plication must  displace  the  other.  The  line  between  con- 
suming and  saving  (spending  and  investing)  is  drawn  at  the 
point  of  equality  between  two  opposing  attractions.  For 
each  individual,  consumption  (spending)  stops  and  saving 
(investment)  begins,  whether  in  long-time  consumption 
goods  or  in  production  goods  or  in  other  directions,  where 
the  advantages  from  saving,  whatever  these  advantages  may 
be,  make  an  appeal  strong  enough  to  displace  present  con- 
sumption. The  choice  must  always  lie  between  postponed 
services  and  present  services,  one  thing  as  against  the  other 
thing,  the  future  against  the  present.  Abstinence  in  this 
sense  there  must  always  be,  wherever  there  exists  a  sum  of 
present  power  to  be  allotted  in  either  of  two  directions  — 
some  recognized  future  need  outranking  any  present  need. 
If  one  does  not  spend,  he  must  invest  in  one  way  or  another. 
But  there  is  no  necessity  of  pain  anywhere  in  the  case.  And 
if  there  is  pain,  it  is  the  pain  which  goes  with  the  fact  that  a 
present  want  remains  unappeased  and  not  in  the  pain  of  pro- 
vision against  some  future  Avant.  Abstinence,  then,  there 
always  is  behind  every  item  of  loan  fund,  so  far  as  it  is  true 
that  the  loan  fund  really  depends  upon  saving.  But  with 
that  part  of  the  loan  fund  created  by  banks  there  is  no  room 
for  any  antecedent  saving.  The  customer  of  the  bank  has  no 
present  purchasing  power  until  the  bank  intervenes  in  his 


364  THE  ECONOMICS  OF  ENTERPRISE 

bohalf  and  renders  his  future  paying  power  over  into  present 

oiirreney. 

Individual  saving.  —  The  simpler  aspects  of  the  savings 
problem  are  easily  analyzed.  Assume,  for  example,  that  the 
income  of  a  particular  individual  in  actual  society  depends 
upon  dividends  derived  from  an  earlier  investment  in  stocks, 
and  that  no  personal  productivity  enters  into  the  problem. 
In  this  case  the  line  between  present  and  deferred  service  is 
easy  to  draw  for  the  ideally  reasonable  man,  though  hard  to 
draw  for  any  actual  man.  Nevertheless,  it  must  in  any  case 
be  somehow  draA\Ti,  and  will  be  drawn  at  the  margin  where 
present  needs  and  future  needs  are  at  equal  appreciation  in 
the  present  comparison. 

Prospective  changes  in  income.  —  If,  however,  allowance 
must  be  made  for  an  expected  change  in  the  dividends,  the 
margin  must  somewhat  shift.  If  the  next  year's  return  is 
likely  to  be  scant,  some  portion  of  this  year's  funds  will 
reasonably  be  held  over  to  the  next  year.  It  would,  in  such 
case,  be  admissible  to  lend,  if  necessary,  some  of  this  year's 
funds  without  interest,  or  even  at  some  loss  in  the  principal 
sum.  A  low  interest  rate,  or  even  a  negative  rate,  might 
be  accepted.  In  view  of  the  prospective  scant  supply,  and 
thus  of  the  changing  relation  of  the  objective  goods  to  the 
individual's  desire  —  in  view,  that  is,  of  the  rising  utility 
of  funds  with  passing  time  —  the  subjective  phenomena  of 
interest  are  all  present.  In  the  mere  fact  of  a  relative  future 
scarcity,  there  is  interest  sufficient  to  dispense  with  the  neces- 
sity of  any  objective  increase  in  the  fund.  If,  however, 
the  next  year's  income  promises  to  be  relatively  abundant, 
the  exchange  relations  of  present  funds  against  future  funds 
will  be  greatly  in  favor  of  the  present ;  a  high  interest  rate 
on  borrowed  funds  would  readily  be  paid  —  perhaps  200  of 
that  time  for  100  of  the  present  time.  Rationally,  all  de- 
pends on  the  relative  provisionment.  Actually,  in  any  case, 
the  line  will  be  drawn  where  the  present  appreciation  of  the 
future  good  makes  equal  appeal  with  the  present  good. 

Uncertainty  of  later  income.  —  And  evidently  the  larger 
the  uncertainty  as  to  the  amount  of  the  next  year's  dividend, 


THE  LOAN  RATE:    INTEREST  365 

or  the  greater  the  doubt  whether  there  will  be  any  dividend 
at  all,  the  stronger  is  the  influence  to  limit  the  consumption 
in  the  present  and  thus  to  lower  the  rate  of  premium  at  which 
the  individual  will  consent  to  exchange  present  funds  against 
future  funds. 

Changing  needs.  —  So  far,  the  analysis  has  taken  the 
individual's  aggregate  of  needs  to  be  practically  constant. 
If,  however,  while  the  income  is  stable,  the  needs  of  the  future 
promise  to  be  relatively  great,  e.g.,  by  sickness,  or  more 
children,  or  old  age,  the  demand  of  the  present  will  weaken 
relatively,  provision  for  the  future  will  tend  to  be  more  gen- 
erous, and  lending  will  be  considered  at  a  lower  rate  of  in- 
terest premium.  On  the  other  hand,  any  especial  urgency 
of  present  needs  relatively  to  future  needs  will  call  for  high 
rates,  if  the  individual  is  to  lend,  or  will  justify  high  rates  of 
payment  if  the  individual  is  to  borrow. 

Personal  earning  power :  changes.  —  But  it  is  with  the 
introduction  of  personal  earning  power  and  of  changes  in 
this  earning  power,  taken  in  connection  with  the  introduction 
of  the  changing  earning  power  of  the  individual's  possessions, 
that  the  analysis  becomes  especially  complicated. 

The  difficulties  are,  however,  not  great  when  allowance 
is  to  be  made  solely  for  the  existence  of  personal  earning 
power,  or  for  changes  in  this  earning  power,  or  for  changes 
in  the  stress  and  strain  and  pain  of  putting  it  forth.  Other 
things  remaining  equal,  the  prospect  of  increasing  earning 
power  will  lower  the  necessity  of  provision  for  the  future 
out  of  the  present,  will  allow  a  larger  immediate  consumption 
of  present  product,  will  make  higher  the  rate  of  premium  if 
the  individual  is  to  lend,  and  will  make  higher  the  premium 
that  he  will  offer  if  he  is  disposed  to  borrow  —  that  is,  will 
raise  the  interest  rate,  the  premium  of  present  over  future. 
The  prospect  of  a  diminishing  personal  earning  power,  other 
things  remaining  equal,  will  reverse  all  this :  saving  will  be 
more  urgent,  lending  more  attractive,  minimum  interest 
terms  lower. 

The  marginal  adjustment.  —  How  far,  then,  in  the  actually 
existing  competitive  society,  shall  any  one  man  —  say  Mr. 


366  THE  ECONOMICS  OF  ENTERPRISE 

Rockefoller  —  direct  his  wraith  to  present  consumption, 
and  how  far  allot  it  to  future  uses  ?  It  is  not  to  the  purpose 
to  point  out  that  Mr.  Rockefeller  could  not  possibly  con- 
sume all  his  wealth,  or  even  the  income  from  all  of  it  —  that, 
as  to  the  larger  share  of  it,  no  sacrifice  can  be  involved  in 
the  postponed  use.  There  is  still  some  part  of  his  wealth, 
however  small,  that  he  can  consume  if  he  will,  and  can  re- 
frain from  consuming  if  he  choose.  With  him,  as  with 
other  men,  there  is  a  line  of  choice,  a  margin,  at  which  present 
use  and  future  use  are  of  equal  attractiveness.  He  may 
spend  dollars  or  millions ;  but  he  could  spend  more  or  less 
accordingly  as  he  appraises  the  relative  attractiveness  of 
the  alternative  applications  of  his  wealth.  There  are  gifts 
to  be  made  now  and  gifts  to  be  made  in  the  future.  Within 
his  field  of  solicitude  are  the  existing  Rockefellers  and  other 
existing  needj^  human  beings,  and  there  will  be  further  gen- 
erations of  Rockefellers  as  well  as  of  the  future  race  at  large. 
There  is,  then,  for  him  a  margin  of  displacement  between 
present  uses  and  future  uses.  In  this  sense,  but  in  no  sense 
of  pain,  he  has  a  marginal  "  abstinence  "  which  is  the  point 
of  limitation  upon  his  saving. 

Factors  in  the  adjustment.  —  But  now  note  that  there  are 
open  to  him  three  different  lines  of  saving :  (1)  durable  con- 
sumption goods,  —  houses,  yachts,  parks,  pianos,  tennis 
rackets ;  (2)  gain-rendering  goods,  —  securities,  factories, 
refineries,  railroads,  mines,  etc. ;  (3)  loans  to  other  men  who 
have,  like  him,  their  individual  choices  between  present  and 
future  uses  and  the  same  three  different  directions  of  future 
use.  Rationally,  Mr,  Rockefeller's  whole  store  of  present 
wealth,  as  an  aggregate  supply,  must  be  apportioned  among 
these  four  demands  —  the  demand  for  present  consumption 
being  included  —  according  to  the  principle  of  maximum 
utility,  no  one  use  being  permitted  to  displace  a  more  im- 
portant use. 

The  aggregate  loan  supply.  —  It  is  evident,  then,  that,  so  far  as 
the  loan  fund  at  any  given  time  is  made  up  from  diverting  present 
income  to  pro\ading  income  for  future  needs,  there  is  for  each 
different  man  an  abstinence  Umitation  upon  the  funds  that  he  allots 
to  future  uses.     And  equally  evident  is  it  that  at  any  particular 


THE  LOAN  RATE:    INTEREST  367 

time  there  is  a  limit  to  the  supply  of  immediate  funds  derivative 
from  the  future  paying  power  which  the  bankers,  through  their 
guarantee  function,  are  making  effective  as  present  paying  power. 
This  limit  is  a  cost  limit  —  the  indemnity  necessary  to  enlist  the 
activity  of  the  bankers  in  assuming  not  only  the  risks  of  the  process, 
but  also  the  expense  of  providing  reserves  and,  in  addition,  the 
charges  for  administrative  expense. 

Equally  evident  is  it  that  the  share  of  funds  which  any  indi- 
vidual refrains  from  spending  and  sets  aside  for  investment  will 
depend  in  part  upon  the  rate  of  the  advantage  in  prospect.  The 
point  of  indifference  between  spending  and  investing  is  a  different 
point  with  every  change  in  resources,  in  present  needs,  in  prospec- 
tive needs,  and  in  the  rate  of  gain  which  may  be  secured  from  invest- 
ment. So,  again,  the  volume  of  funds  which  the  different  banks 
will  create  will  depend  in  part  upon  the  compensations  which  are 
offered  them  for  extending  their  activities  of  guarantee.  There  is, 
therefore,  no  such  thing  as  explaining  the  supply  of  investment 
funds  unless  with  constant  reference  to  the  rate  of  return  that  is 
open.  In  other  words,  the  rate  of  interest  upon  any  particular 
class  of  funds  is  not  determined  by  the  abstinence  rates  of  the 
investors,  or  by  the  cost  rates  of  the  bankers,  but  is  merely  the 
point  of  equation  between  the  costs  of  supply  and  the  gains  of  de- 
mand. Nowhere,  indeed,  either  in  the  interest  problem  or  else- 
where, is  the  market  adjustment  dependent  solely  on  the  supply 
side  of  the  market  equation.  Nor  would  especial  emphasis  upon 
this  point  be  necessary  in  the  interest  analysis,  were  it  not  true 
that  interest  is  often  interpreted  as  fixed  by  the  degree  of  protest 
against  abstinence,  as  purely  a  matter  of  the  relative  emphasis 
on  present  consumption  as  against  future  consumption.  The  truth 
is  that  the  supply  of  funds  is  not  exclusively  determined  by  the  absti- 
nence principle,  and  that  even  were  the  supply  so  determined,  the 
returns  upon  investment  would  have  much  to  say  as  to  the  extent 
to  which  present  consumption  would  be  limited.  So  far  as  savings 
are  the  source  of  loan  fund,  there  must  be  recognized  for  each 
individual  his  own  particular  marginal  abstinence,  a  final  item  of 
supply  at  wliich  the  attractions  of  spending  and  of  saving  are 
equated.  Every  man  is,  for  some  of  his  saving,  a  marginal  saver  — 
has,  that  is  to  say,  a  marginal  abstinence.  But  where  this  margin 
is  drawn  is  as  much  a  question  of  the  advantages  to  be  derived  from 
saving  as  it  is  a  question  of  the  pressure  of  present  need.^ 

^  The  foregoing  statement  holds  good  even  though  it  be  true 
that,  on  the  side  of  provision  for  future  income,   falling  interest 


3GS  rilE  ECOXOMICS  OF  KXTERPRISE 

Savings,  gain  and  interest  rates. — Wluit  is.  in  fact,  tho 
pivcise  bearing  of  tl\e  individiuil's  opportunity  to  employ 
gainfully  his  wealth  with  passing  time  —  to  reap  an  incre- 
ment with  the  time-use?  The  very  terms  of  the  problem 
imply  a  iliminished  share  of  present  money  income  allotted  to 
present  spendhiu;.  and  a  more  than  corrospontling  increase  in 
the  prospective  future  supply.  How  far,  then,  does  tlu^  pro- 
ductivity of  wealth  in  time  affect  the  interest  rate? 

Obviously,  the  interest  rate  must  l)t>  at'tot'ttxl.  The  incre- 
ment can  be  had  only  on  terms  of  restricting  somewhat  the 
present  consumption.  This  restriction  raises  for  him  the 
marginal  utility  o(  the  pn^seut  wealth  or  o(  the  present  pur- 
chasing power.  On  the  other  lunul.  the  promised  increase 
in  future  provisionment  diminishes  the  marginal  utility  of 
future  wealth  or  of  future  purchasing  power.  Put  into  terms 
of  the  familiar  categories,  this  promise  of  increment  with 
passing  time  is  an  increase  in  the  demand  for  present  funds, 
to  be  followed  by  an  increase  in  the  supply  of  future  income. 
Gainful  uses  play,  then,  a  distinct  and  important  role  in  the 
making  up  of  the  total  demand  for  present  wealth.  In  its 
bearing  upon  the  present  need,  the  gainful  use  is  like  a  present 
sickness  or  the  birth  of  a  child.  It  presses  against  the  total 
of  resources ;  it  starves  the  other  needs ;  it  increases  the 
marginal  significance  of  wealth  either  for  present  consump- 
tion or  for  investment,  at  the  same  time  that  it  increases 
the  marginal  sacrifice  of  postponing  goods  to  future  uses. 
Therefore,  of  itself,  and  purelj'  as  a  present  influence,  it 
must  tend  to  raise  the  postponement  charge. 

But  it  does  more :  By  the  attendant  promised  addition 
to  future  income,  its  intiuence  is  to  reduce  the  marginal  signifi- 
cance of  future  wealth  or  of  future  purchasing  power.  Here 
is,  therefore,  to  be  recognized  a  second  and  distinct  influence 
to  raise  the  relative  importance  of  the  present  over  the  future 
and  to  increase  the  interest  rate. 

Or  to  put  the  case  in  another  way  :   Out  of  the  individual's 

rates  themselves  impose  the  necessity  of  larger  funds  in  order  to 
proWde  a  given  tixod  return.  It  is  not  incredible  that,  on  the 
whole,  falling  interest  stimulates  saving,  despite  the  weakening 
appeal  of  the  du-ect  motive  of  gain. 


THE  LOAN  RATE:    INTEREST  '369 

total  supply  of  goods,  present  and  future,  some  part  can  go 
for  prescjit  needs,  some  part  can  be  directed  to  future  needs. 
What  part  of  the  goods  available  to  the  present  will  Jje  al- 
lotted to  the  present  ?  So  far  as  the  present  goods  are  alone 
concerned,  the  problem  is  one  of  distributing  these  present 
resources  according  to  the  principle  of  maximum  utility  as 
recognized  in  the  present  time.  But  it  is,  in  fact,  a  distribu- 
tion which  must  take  account  of  many  goods  that  do  not 
yet  exist.  Those  goods  which  are  not  yet,  but  may  come  to 
be,  through  the  sacrifice  of  some  of  the  present  uses  of  exist- 
ing goods,  are  among  the  influences  bearing  upon  the  distri- 
bution of  the  present  goods  to  limit  the  supply  of  those  al- 
lotted to  present  consumption.  The  existence  of  earning 
power  with  time  must,  therefore,  bring  about  for  the  indi- 
vidual a  higher  postponement  charge,  irrespective  of  the 
promised  attendant  increase  in  the  supply  of  future  goods  as 
a  force  affecting  the  utility  of  the  future  goods.  Therefore, 
when  the  saved  wealth  goes  to  uses  controlling  increments 
in  time,  there  is  a  distinct  influence  to  be  recognized  as  bear- 
ing upon  the  marginal  utility  of  future  wealth  and,  there- 
fore, upon  the  relative  marginal  utility  of  present  wealth 
as  against  future  wealth,  and,  therefore,  upon  the  interest 
rates  indicative  of  the  terms  of  exchange  between  present 
purchasing  power  and  future  purchasing  power. 

Interest  not  mere  perspective.  —  The  fact  clearly  is  that 
the  earning  power  of  wealth  in  time  has  great  significanee  for 
the  rates  that  will  be  paid  for  the  present  control  of  purchas- 
ing power.  The  rate  is  not  purel}^  the  expression  of  a  "  pref- 
erence for  early  enjoyable  income  over  late  enjoyable  in- 
come," ^  and  of  the  degree  in  which  future  consumables  suffer 
in  present  estimation  as  against  present  consumables.  This 
may  be  clear  by  a  simple  illustration :  Suppose  that  to-day 
all  present  needs  and  desires  for  immediate  consumption 
have  been  fully  satisfied  —  a  situation  in  which,  by  the  terms 
of  the  assumption,  there  can  be  neither  any  "  prospective 
underestimation"  of  the  future  nor  any  degree  of  inadequacy 
in  "  present  provision,"  —  there  being  in  fact  no  unsatisfied 
desires  for  present  consumption,  but  only  a  clear  apprecia- 

1  The  Rate  oj  Interest,  Irving  Fisher,  Macmillan,  1908,  p.  80. 
2b 


370  THE  ECONOMICS  OF  ENTERPRISE 

tion  of  to-morrow's  needs.  If,  now,  it  be  discovered  that 
for  each  unit  of  tiie  existing  wealth  there  may  by  to-morrow 
be  derived  two  units  for  to-morrow's  consumj^tion,  it  is  clear 
that  there  will  set  in  forthwith  a  vigorous  bidding  for  the 
currency  with  which  to  control  the  present  facts  offering  a 
command  of  to-morrow's  consumable  goods,  and  that  there 
must  result  an  interest  rate  approximating  100  per  cent 
per  day,  payable  at  the  end  of  the  loan  period.  And  it  is 
equally  clear  that  no  one  can  need  the  present  consum- 
able goods  unless  to  keep  them  till  to-morrow.  The  doc- 
trine that  interest  resolves  itself  always  into  a  perspective 
between  present  consumable  income  and  future  consumable 
income  will  evidently  not  hold.  Rather  must  it  be  true 
that  the  mere  presence  of  gain-rendering  goods  will  always 
in  a  competitive  and  pecuniary  society  immediately  attach 
an  interest  rate  to  money  loans  or  to  loans  of  purchasing 
power  expressed  in  money.  All  that  needs  be  assumed 
is  that  the  level  of  prices  shall  not  change.  All  goods  con- 
trolling an  increment  of  future  goods  must  therewith  control 
an  increment  of  price.^ 

^  Abstinence. 

The  abstinence,  or  impatience,  theories  of  interest  are  several 
in  emphasis  or  in  aspect  —  regarding  interest. 

(I)  As  one  sort  of  reward  for  waiting. 

(II)  As  the  reward  for  waiting  in  general. 

(III)  As  the  reward  for  the  abstinence  represented  in  the  exist- 
ence of  non-land  wealth. 

(IV)  As  a  reward  fixed  and  determined  by  the  degree  of  pain 
or  abstinence  in  the  marginal  waiting  and  proportional 
to  it. 

(V)  As  a  reward  morally  justified  by  the  burdens  of  waiting. 

(I)  It  must  be  ob\-ious  that  whoever  pays  me  for  my  loan  to 
him  of  suspended  purchasing  power  pays  me  for  foregoing  that 
next  best  use  of  the  purchasing  power  which  is  open  to  me,  whether 
for  consumption,  or  for  employment  in  my  own  business,  or  for 
lending  to  some  third  person,  or  for  holding  in  the  bank  or  safe  or 
cellar  awaiting  my  later  direction  or  use.  If  this  is  all  that  is  meant 
by  the  abstinence  doctrine,  it  is  axiomatically  true,  implying  merely 
that  the  borrower  pays  the  lender  for  the  use  of  what  the  lender 
allows  the  borrower  to  have.  Instead  of  keeping  my  own  pur- 
chasing power  in  my  own  hands  and  under  my  own  control,  I 


THE  LOAN  RATE:    INTEREST  371 

More  goods  versus  more  money  income.  —  Recalling, 
however,  that  gain  to  the  entrepreneur  is  always  gain  in 
terms  of  price,  and  that  gain  in  terms  of  an  increase  in  bushels 
or  yards  or  gallons  is  entirely  beside  the  purpose  unless 

allow  the  borrower  to  take  it  and  to  use  it  for  a  specified  time  for 
his  own  benefit ;    and  he  pays  me  interest  therefor. 

(II)  But  there  are  other  modes  of  lending.  I  may  turn  over 
my  land  to  the  borrower  for  a  specified  time.  To  lease  this  land  to 
him  for  rent  is  to  forego  my  direct  use  of  it.  If  I  had  sold  him 
the  land,  allowing  the  entire  purchase  price  to  run  for  a  term  at 
interest,  he  would  then  be  paying  me  in  terms  of  interest  approxi- 
mately the  same  sum,  for  precisely  the  same  service,  as  under  the 
alternative  payment  in  the  form  of  rent.  This  second  method, 
the  interest  method,  is,  that  is  to  say,  merely  another  form  of 
paying  for  the  use  of  the  same  thing. 

Rent,  therefore,  equally  with  machine  hires  and  with  premiums 
for  the  present  control  of  loan  funds,  must  fall  within  the  category 
of  interest  in  its  widest  and  least  technical  sense,  and  must  be 
regarded  as  a  reward  of  "abstinence."  The  abstinence  theory 
in  this  sense  raises,  then,  only  one  issue  —  that  of  the  possibility 
of  distinguishing  land  rent  from  other  rent,  and  land  hires  from 
the  hires  of  other  instruments.  That  is  to  say,  the  notion  of  absti- 
nence as  the  test  of  capital,  and  the  remuneration  for  abstinence  as 
the  test  of  interest,  must  rank  land  as  capital  and  its  remuneration 
as  interest,  and  must  assign  to  hires  of  land  and  to  hires  of  machines 
one  and  the  same  relation  to  cost  of  production  and  to  market 
price. 

(III)  Interest  as  the  reward  for  the  abstinence  represented  in  non- 
land  ivealth.  In  fact,  however,  interest  has  more  commonly  been 
limited  to  the  return  upon  such  wealth  as  is  due  to  the  industry 
of  man  as  distinguished  from  the  bounty  of  nature.  The  distinc- 
tion emphasized  by  this  view  is  purely  genetic,  pointing  to  the 
original  sources  of  the  wealth  that  is  lent.  The  test  has  reference 
solely  to  differences  in  origin  between  items  of  equipment  in  the 
productive  process.  In  substance  two  kinds  of  rents  are  set  up  — 
machine  rents  and  land  rents  —  and  only  the  first  of  these  rents  is 
called  interest.  Interest  in  one  sense  land  rent  unquestionably  is, 
being  an  income  from  wealth :  this  view  regards  the  ease  from  the 
standpoint  of  the  investor  in  land.  But  the  view  under  examina- 
tion denies  that  incomes  from  land  are  interest,  even  when  the  rent 
is  expressed  as  a  return  per  cent  upon  the  value  of  the  land.  Nor, 
in  this  view,  can  it  matter  that  the  purchase  price  of  the  land  may 
have  been  saved  out  of  wages  or  salary  or  have  been  derived  from 
the  sale  of  a  machine  ;  the  investment  being  now  in  land,  the  income 
is  regarded  not  as  interest  on  capital,  but  as  belonging  to  an  entirely 


372  THE  ECONOMICS  OF  ENTERPRISE 

as  an  intermediate  step  to  gain  in  price,  it  is  not  quite  axio- 
matic tiiat  the  production  goods  which  promise  an  increase 
of  concrete  product  witli  passing  time  must  promise  also 
an  increased  aggregate  of  selling  power.     Only  when  the 

separate  category,  rent  on  land.  And  if  the  income-rendering 
fact  is  a  franchise  or  a  patent  right  or  good  will,  these,  though  not 
factors  of  production  in  a  mechanical  or  technological  sense,  are 
somehow  conceived  to  earn  interest  rather  than  rent.  Not  being 
land,  how  can  they  earn  rent  ?  And  their  returns  being  something, 
what  shall  they  be  if  not  interest  ?  The  current  and  actual  interest 
rates  are  taken  to  derive  their  explanation  from  the  earning  powers 
of  the  non-land  items  of  wealth ;  that  is  to  say,  the  rents  of  ma- 
chinery and  of  other  non-land  properties  are  invoked  to  explain  the 
interest  rate,  or  the  interest  rates,  on  the  basis  of  which  the  rents 
of  land  are  capitalized  into  a  market  value. 

And  if  the  owner  of  the  farm  has  sold  it,  with  the  live  stock  and 
machinery,  on  time  to  the  tenant,  and,  together  with  this,  has  ad- 
vanced to  the  tenant  funds  saved  out  of  past  wages  and  profits,  the 
doctrine  under  examination  would  logically  be  unable  to  tell 
whether  this  total  of  funds  is  or  is  not  capital,  or  what  part  is 
capital,  or  that  anj^  part  is  capital.  This  particular  type  of  the 
abstinence  theory  of  capital  and  interest  purports  to  explain  the 
actual  rate  of  interest,  through  the  rents  of  those  factors  of  pro- 
duction derived  from  labor.  In  fact,  if  funds  must  be  admitted  to 
earn  interest,  the  explanation  will  be  offered  that  they  are  lent 
to  borrowers  who  invest  them  in  such  goods  as  can  earn  such  in- 
comes as  may  be  called  interest.  And  if  it  be  objected  that  this 
is  to  abandon  the  distinction  of  origin  —  to  turn  from  the  past 
of  source  to  the  future  of  application  —  it  will  be  replied  that 
this  matters  only  formally  —  that  the  interest  rate  on  the  funds  in- 
vested traces  back  to  the  labor-produced  appliances  of  industry, 
and  that  these  other  investments  in  land  and  in  franchises  and  in 
tax-farming  contracts  and  in  Peruna  brewing  and  in  Hop-Bitters 
advertising,  are  somehow  not  to  be  bothered  about.  Interest 
niust  go  back  to  labor-produced  wealth,  else  it  can  find  no  basis 
in  an  original  abstinence :  only  so,  in  fact,  can  capital  be  held  to 
be  merely  stored-up  labor ;  only  so  can  all  capital  outlays  be  re- 
duced to  wage  advances  upon  past  labor ;  only  so  can  land  be 
denied  to  be  capital ;  only  so  can  land  rent  be  eliminated  from 
cost  of  production ;  only  so  can  prices  be  fixed  by  wages  and  inter- 
est outlays  upon  marginal  land  ;  only  so  can  either  the  labor  theory 
or  the  wage  theory  of  value  be  supported. 

It  was,  in  fact,  the  necessities  of  the  labor  theory  of  value  that 
enforced  the  abstinence-in-origin  theory  of  interest  and  the  absti- 
nence-in-origin  line  of  distinction  between  land  and  capital.      If 


THE  LOAN  RATE:    INTEREST  373 

later  product  will  command  more  money  than  the  earlier 
product  is  there  room  for  gain  and  motive  for  interest.  There 
certainly  are  cases  where  the  increase  in  concrete  product  is 
more  than  offset  by  the  effect  of  the  increasing  supply  to 

prices  were  to  be  made  proportional  either  to  outlays  in  wages  or 
to  the  pains  of  labor,  it  was  necessary  to  find  the  price-determining 
cost  of  production  where  no  land  cost  could  enter.  Production 
upon  marginal  land,  rentless  land,  was  appealed  to  for  this  purpose. 
But  it  is  obvious  that  there  are  also  capital  costs  on  this  marginal 
land.  It  then  became  necessary  to  reduce  all  these  capital  costs 
to  wages,  and  by  this  method  to  interpret  all  capital  as  stored-up 
labor :    so  viewed,  the  capitalist  is  only  a  laborer  gone  to  seed. 

Thus  it  came  about  that  wages  and  interest  were  conceived  as 
causes  of  value  while  rent  was  a  result.  "Corn  is  not  high  because 
rent  is  paid,  but  rent  is  paid  because  corn  is  high.  ...  If  the  high 
price  of  corn  were  the  effect  and  not  the  cause  of  rent,  prices  would 
be  proportionally  influenced  as  rents  were  high  or  low,  and  rent 
would  be  a  component  part  of  price."  ^  The  doctrine  is  that  the 
high  wages  and  the  high  interest  cause  the  high  prices,  and  the 
high  prices  cause  the  high  rents  :  the  rents  are  the  result  of  that  of 
which  the  wages  and  the  interest  are  the  cause. 

But  even  so,  the  theoretical  structure  of  classical  Economics 
was  not  complete.  The  significant  aspect  of  labor  as  cost  must 
lie  ultimately  in  the  pains  of  labor.  The  problem,  therefore,  was 
to  make  prices  proportional  to  the  labor  pains  of  production.  To 
the  employer,  truly,  the  wages  and  not  the  pains  of  the  employee 
must  rank  as  costs.  And  it  is  evident  that  prices  are  directly 
dependent  upon  employers'  costs.  So  be  it :  as  meeting  this 
difficulty,  the  labor-cost  doctrine  asserted,  out  of  hand,  that  the 
wages  paid  by  the  entrepreneur  for  the  labor  are  themselves  pro- 
portionate to  the  laborers'  pains  incurred  in  the  labor.  So  much 
being  naively  but  satisfactorily  established  —  values  being  pro- 
portional to  wages  and  wages  to  pains  —  values  were  declared 
proportional  to  pains. 

That  the  positions  under  criticism  are  on  the  whole  character- 
istic of  existing  economic  authority  will  be  evident  from  the  fol- 
lowing quotations : 

"The  division  of  labor  between  those  who  carry  on  the  suc- 
cessive stages  of  production  conceals  the  essential  nature  of  their 
operations.  A  manufacturer  spends  only  a  part  of  his  means 
upon  hiring  laborers  directly ;  the  rest  he  uses  in  buying  plant  and 
materials  and  in  the  other  expenses  of  production.     But  those 

^  Ricardo,  Political  Economy,  Conner's  Ed.,  chap,  ii,  sec.  29. 


374  THE  ECONOMICS  OF  ENTERPRISE 

depress  the  price  per  item.  If,  however,  the  exchange  power 
of  money  rohitivoly  to  commodities  in  general  is  not  changed 
—  if  the  supply  of  currency  is  adequate  to  maintain  stability 

materials  were  themselves  fashioned  by  laborers  to  whom  another 
set  of  advances  had  to  bo  made  by  a  previous  capitalist.  The 
wholesale  or  retail  merchant  hires  comparatively  few  laborers,  — 
only  a  set  of  clerks  and  a  porter  or  two.  But  he  recoups  bj'  his 
purchases  of  goods  the  advances  of  a  long  series  of  preceding  em- 
ployers, himself  giving  only  the  finishing  touches  in  the  whole 
process.  Looking  at  the  operations  of  capitalists  and  employers 
as  a  whole,  and  reflecting  on  the  outcome  of  the  division  of  labor 
among  them  and  their  workmen,  we  find  that  all  capital  is  made  by 
labor,  and  all  the  operations  of  the  capitalist  class  are  resolvable 
into  a  succession  of  advances  to  laborers.  .  .  .  Some  are  made 
from  day  to  day,  in  the  course  of  current  operations.  The  whole 
of  existing  capital  may  thus  be  described  as  a  great  accumulated 
surplus  which  has  been  used  and  is  being  used  for  maintaining 
labor,  .  .  ."  ^ 

"Not  only  the  creation  of  capital  involves  labor  and  saving; 
its  maintenance  does  so  also."  ^ 

"Rent  forms  no  part  of  the  expenses  of  production;  that  is,  it 
forms  no  part  of  those  expenses  of  production  which  affect  price. 
It  is  a  differential  gain,  an  excess  over  and  above  the  total  expenses 
of  the  more  fortunate  producers.  Price  is  determined  by  the  cost 
of  the  marginal  increment.  Rent  is  not  one  of  the  factors  bearing 
on  price,  but  is  the  result  of  price.  It  is  due  to  the  comparatively 
high  price  which  must  be  paid  to  bring  out  the  total  suppl3\"  * 

"By  expenses  of  production  we  mean  the  outlays  that  must  be 
made  to  bring  a  commodity  to  market,  —  what  must  be  paid  for 
wages,  materials,  and  the  like.  Since  the  materials  themselves  are 
made  by  labor,  and  the  outlays  of  capitalists  are  resolvable 
into  a  succession  of  advances  to  laborers,  expenses  of  produc- 
tion in  the  end  are  simply  wages.  By  cost  of  production  we 
mean  efforts  and  sacrifices  —  mainly  labor.  The  distinction 
between  expenses  and  cost  —  between  wages  and  labor  —  is  an 
obvious  one  and  an  important  one,  though  unfortunately  not  in- 
dicated by  any  well-established  phraseology.  In  everyday  lan- 
guage people  mean  by  'costs'  employer's  outlays;  and  this  cur- 
rent usage  was  accepted  in  most  of  what  has  preceded.  In  what 
is  to  follow,  it  will  be  helpful  to  keep  these  two  notions  distinct, 
and  'cost'  will  be  used  in  the  sense  of  labor  or  effort."  ^ 

"...  Expenses  of  production  and  cost  of  production  ordi- 
narily run  together."  ^ 

^Taussig,  Principles  of  Econmnics,  Vol.  1,  p.  75.     Macmillan,  1911. 
^Ihid.,  p.  77.      Ubid.,  Vol.  2,  p.  56.      ^  Ihid.,  p.  147.      ^  Ihid.,  p.  153. 


THE  LOAN  RATE:    INTEREST  375 

in  general  prices  —  it  must  be  clear  that  an  increased  num- 
ber of  items  of  product  must  carry  with  it  an  increase  in 
the  aggregate  selling  price,  if  onhj  the  price  per  item  has 
not  especially  suffered.  In  the  general  average,  therefore, 
more  instrumental  goods,  more  equipment,  must  mean  not 
only  more  products,  but  a  greater  total  of  selling  price  and 
therewith  room  for  price  gain.  By  assumption  —  be  it  re- 
called —  the  general  price  situation  has  not  changed. 

"We  define  private  or  acquisitive  capital  as  any  product  of 
human  industry  that  serves  as  a  source  of  income  to  individuals. 
It  includes:  1.  Those  forms  of  social  or  productive  capital  that 
are  subject  to  private  ownership,  and  serve  as  sources  of  income  to 
individuals.     Land  is  not  included.' 

"Profits  are  neither  more  nor  less  than  the  excess  of  the  selling 
price  of  the  products  of  industry  above  the  amount  advanced  as 
wages.  It  is  true  that  some  of  the  investments  of  an  individual 
capitalist  are  not  made  in  the  form  of  wages,  but  in  payments 
for  materials  and  machinery  which  other  capitalists  have  m.ade 
ready  for  use.  But  if  we  look  at  the  relation  between  capitalists 
as  a  class,  we  shall  find  that  the  capitalists  as  a  body  advance 
wages.2 

But  to  make  the  pain  proportion  complete  something  had  to  be 
done  with  interest  costs.  Wages  and  interest  together  being  taken 
to  be  the  price-determining  costs,  a  pain  basis  must  be  found  for 
the  interest  as  well  as  for  the  wages.  The  famous  economist, 
Senior,  came  to  the  rescue  with  the  announcement  that  the  pains 
of  abstinence  lie  behind  saving  and  offer  a  pain  basis  for  the  deter- 
mination of  interest. 

Time  suffices  only  to  indicate  what  Senior's  reasoning  im- 
plicitly asserted  or  assumed  : 

1.  Not  merely  that  aU  labor  is  painful  and  that  the  pains  of  dif- 
ferent laborers  are  homogeneous  for  the  purposes  of  comparison 
and,  as  homogeneous,  are  reducible  to  units  of  pain  adapted  to 
being  set  over  against  units  of  wage  compensation,  — 

2.  Not  merely  that  abstinence  is  a  pain  and  that  all  abstinences 
are  homogeneous  so  as  to  be  reduced  to  pain  units  adapted  to  being 
set  over  against  units  of  interest  compensation,  but  also, 

3.  That  labor  pain  units  and  abstinence  pain  units  can  be  made 
homogeneous  and  so  together  be  set  over  against  the  homogeneous 
units  of  price  product  and  of  money  compensation. 

^  Bullock,  Ijitroduction  to  the  Study  of  Economics,  3d  ed.,  p.  423. 
^Hadley,  Economics,  p.  124. 


376  TIIK  ECONOMICS  OF  ENTERPRISE 

If,  then,  there  are  exceptional  cases  in  which  the  aggre- 
gate price  product  suffers  despite  the  increase  in  the  num- 
ber of  items  producetl,  there  must  be  a  still  more  marked 
gain  in  price  for  the  remaining  industries  as  an  average. 
Failure  of  price  gain  to  attend  a  gain  in  concrete  product 
is  thereby  proved  to  be  exceptional,  and  basis  is  established 
for  the  payment  of  interest  in  every  case  which  is  not  ex- 
ceptional. Therefore  funds  must  bear  interest.  Invest- 
ment will  seek  the  field  in  which  gain  is  possible  and  will 
avoid  that  relative  overproduction  which  in  the  exceptional 
case  would  mean  a  loss. 

Competitive  gain  in  time  affects  rate  on  funds.  —  It  is 
evident  that  these  openings  for  gainful  investment  must 
have  a  direct  bearing  upon  the  rate  of  interest,  if  for  no  other 
reason,  by  the  very  fact  that  they  help  absorb  the  supply 
of  loanable  funds ;  they  offer  avenues  of  investment ;  the 
creation  of  equipment  requires  the  diversion  of  productive 
power  away  from  the  service  to  immediate  consumption. 
Thus,  so  long  as  instruments  of  production  are  serviceable 
in  the  increase  of  product  and  as  services  are  rendered  in 
time  and  are  roughly  proportionate  to  time,  time  charges 
for  the  use  of  wealth  appear  to  be  inevitable.     Rents  are 

(IV)  The  explanation  of  interest  as  somehow  connected  with 
abstinence  has  already  been  shown  to  contain  an  element  of  impor- 
tant truth,  if  only  the  notion  of  abstinence  be  cleared  of  all  impli- 
cations of  pain,  the  scope  of  possible  abstinence  sutficiently  wid- 
ened, and  the  correct  relations  set  up  between  it  and  the  volume  of 
funds  offered  for  loan. 

(V)  The  discussion  already  had  and  the  analysis  still  to  follow 
should  make  entirely  clear  that  there  is  no  relation  between  the 
income  from  property  and  the  amount  of  pain  or  of  deserving  in- 
volved either  in  the  getting  of  the  property  or  in  the  keeping  of  it. 
In  other  words  nothing  remains  of  the  notion  of  abstinence  as  an 
ethical  justification  of  interest.  For  this  purpose,  indeed,  absti- 
nence has  never  been  supposed  to  be  good  for  anything  ^ivith  regard 
to  savings  in  the  aggregate  or  with  regard  to  the  interest  paid  upon 
savings  as  an  aggregate,  but  good  only  for  the  marginal  fringe 
of  cases.  But  even  for  the  marginal  case  it  is  good  for  nothing. 
The  social  justification  for  interest,  as  for  private  property  in  gen- 
eral, must  be  sought  elsewhere  and  in  a  different  range  of  consid- 
erations. 


THE  LOAN  RATE:    INTEREST  377 

indeed  interest  in  the  broadest  and  loosest  sense  of  the 
term,  but  in  none  the  less  an  ultimate  and  fundamental 
sense.  And  as  long  as  rents  remain  and  as  consumption 
goods  are  in  exchange  relation  with  equipment  goods,  a 
time  charge  must  exist  both  for  consumption  and  for  equip- 
ment goods. 

Durable  consumption  goods  affect  rate  on  funds.  —  And 
precisely  the  same  analysis  holds  for  the  relation  of  durable 
consumption  goods  to  the  rate  of  interest.  These  goods, 
like  durable  gain-rendering  goods,  afford  service  with  pass- 
ing time,  and  equally  with  gain-rendering  goods,  involve 
the  displacement  of  present  consumption  in  favor  of  later 
consumption  or  absorb  bank-created  funds.  Long-time 
consumption  goods  must,  therefore,  rank  with  long-time 
production  goods  as  among  the  applications  of  present  in- 
come to  those  future  purposes,  through  the  attractiveness 
of  which  the  margin  between  present  use  and  future  use  is 
affected.  The  aggregate  of  uses  of  a  durable  good  of  either 
sort  must  rank  in  the  present  estimation  as  high  as  the  pres- 
ent consumption  that  is  displaced,  else  the  durable  good  will 
not  be  chosen  as  against  goods  for  immediate  consumption. 
A  piano,  or  a  picture,  or  a  dwelling  house  is  as  much  an  invest- 
ment for  future  income  as  is  a  plow,  or  a  farm,  or  a  truck 
wagon   or   a  loom. 

Rents  and  interest  on  funds.  —  Taking  it,  then,  as  established 
that  the  possibility  of  investing  funds  in  the  creation  of  either 
durable  production  goods  or  durable  consumption  goods  tends 
to  support  or  to  raise  the  interest  rate,  and  that  the  existence  of 
opportunities  for  investment  in  the  development  of  mines  or  of 
water  powers,  or  in  the  amelioration  of  agricultural  lands,  or  in 
the  upkeep  of  these  lands,  furnishes  a  corresponding  demand  for 
funds  and  exerts  a  corresponding  effect  upon  the  payment  of  in- 
terest —  we  are  ready  to  examine  a  further  question :  Is  the  mere 
existence  of  rent-bearing  properties,  whether  of  the  production 
or  of  the  consumption  type,  sufficient  to  guarantee  an  interest 
rate? 

To  put  this  to  the  test,  let  there  be  assumed  the  extreme  case 
of  a  society  in  which  agriculture  is  the  only  industry,  land  the  only 
instrumental  good,  with  none  of  this  land  open  either  to  wear-out 
or  to  improvement : 


378  THE  ECONOMICS  OF  ENTERPRISE 

There  will  be  rents,  sui'ely,  but  will  there  be  interest,  and  what  will 
determine  the  rate  of  it?  By  assumption,  the  land  offers  no  oi)cning 
for  soeial  capitalization  either  by  imjirovenient  or  by  upkeep. 
Social  saving  cannot  go  into  it  or  social  improvidence  waste  it. 
It  contributes  to  the  aggregate  income,  but  it  offers  no  place  for 
social  savings.  Socially  viewed,  therefore,  it  can  have  no  bearing  on 
the  interest  rate  excepting  as,  through  its  contribution  to  the  social 
income,  it  avails  to  make  saving  easier.  But  there  remains,  by 
assumption,  no  rent-earning  employment  for  the  savings  unless 
to  put  them  into  long-time  consumption  goods. 

But,  even  so,  an  interest  rate  must  be  established  as  the  equating 
point  between  the  demand  for  immediate  consumption  and  the 
demand  for  the  cnjojniient  of  long-time  consumption  goods  — 
abstinence  on  the  one  side  as  over  against  the  later  incomes  acces- 
sible through  abstinence. 

But  now  assume  further  that  goods  for  immediate  consumption 
are  the  sole  possible  products  :  Here,  however,  as  mostly  elsewhere, 
the  social  point  of  view  serves  rather  to  obscure  than  to  illuminate 
the  analysis  of  the  actual  competitive  process.  It  is  true  that  so 
far  as  society  is  concerned,  the  lands  were  not  due  to  any  original 
labor  or  sa\dng,  are  not  maintained  by  its  abstinence,  absorb 
none  of  its  current  savings,  cannot  be  wasted,  destroyed,  sold, 
or  given  away.  But  Uttle  or  none  of  all  this  is  true  for  the  indi- 
vidual owner  of  land  in  a  competitive  society.  True  —  by  assump- 
tion —  no  individual  created  the  land  or  can  add  an}i;hing  to  it. 
But  any  indi\ddual  can  save,  and  can  buy  land  with  his  savings. 
True,  he  cannot  destroy  the  land  or  deteriorate  it.  But  he  can  do 
what,  for  all  his  individual  purposes,  amounts  to  the  same  thing ; 
he  can  sell  the  land,  and  can  then  dissipate  all  or  any  part  of  its 
proceeds.  For  him,  then,  though  not  for  society,  the  land  is  both 
producible  and  destructible.  It  is  retained  by  him  —  if  retained  at 
all  —  through  his  continuing  providence,  foresight,  abstinence. 
So  it  comes  about  that  there  attach  to  lands  reservation  prices  on 
the  part  of  the  possessors  and  demand  prices  on  the  part  of  prospec- 
tive buyers.  And,  on  either  side,  these  prices  are  arrived  at  through 
subjecting  the  individual  estimates  of  the  future  incomes  to  the 
individual  rates  of  abstinence  protest.  Thus  if  for  the  owner 
present  consumption  outranks  in  attractiveness  the  long  series 
of  opportunities  for  future  consumption,  he  will  sell.  Just  as 
another  man  may  refrain  from  spending  and  buy  land  with  his 
savings,  so  this  owner  may  refrain  from  keeping,  and  spend  the  pro- 
ceeds of  the  sale.     To  him  for  whom  having  is  better  than  spending, 


THE  LOAN  RATE:    INTEREST  379 

the  land  will  especially  api)eal  a.s  an  investment.  To  him  for  whom 
spending  is  better  than  having,  tlie  price  of  the  land  will  be  pre- 
ferred to  the  land. 

It  is  thus  clear  that  the  existence  of  any  kind  of  valuable  durable 
goods  — •  whether  of  the  production  or  of  the  consumption  sort  — 
is  sufficient  to  support  an  interest  rate.  The  goods  —  of  whichever 
class  —  bear  rents.  Offering  future  incomes,  they  offer  inducement 
to  present  abstinence.  They  fall,  therefore,  into  the  hands  of  those 
relatively  the  more  willing  to  undergo  present  abstinence  for  the 
sake  of  future  income.  They  fall  out  of  the  hands  of  those  whose 
preference  is  relatively  the  more  strong  for  the  present  consumption 
— -those  electing  "to  take  the  cash  and  let  the  credit  go."  The 
interest  rate  is  the  basis  on  which  is  adjusted  the  sale  of  these 
future  incomes  as  against  present  cash. 

Private  adventure  and  interest  on  funds:  Renters'  sur- 
pluses. —  And  we  may  now  safely  go  one  step  further : 
The  disappearance  of  interest  in  a  competitive  society  is 
impossible  so  long  as  gainful  adventure  is  open ;  and  gain- 
ful adventure  must  always  be  possible  so  long  as  there  is 
equipment  to  be  hired  or  any  sort  of  opi3ortunity  to  be 
exploited.  This  is  a  necessary  inference  from  the  sole  fact 
of  buyers'  and  renters'  surpluses.  Entrepreneurs  being  dif- 
ferent, the  market  rent  or  the  market  price  of  a  gain-render- 
ing agent  or  instrument  or  opportunity  must  always  afford 
a  surplus  to  some  of  the  employers  above  the  price  or  hire 
that  they  have  to  pay  for  it.  It  will  not  matter  for  this 
purpose  how  low  the  interest  rate  may,  through  other  in- 
fluences, come  to  be,  or  how  high  the  capitalized  present  worth 
of  the  instrument  may  rise  with  falling  rates  of  interest  — 
the  earning  power  to  the  individual  entrepreneur  will  still 
offer  its  surplus  above  the  market  hire  which  the  instrument 
commands.  These  surpluses  must,  therefore,  always  remain 
among  the  incentives  for  borrowing.  There  will  always  be 
a  market  for  immediate  funds  at  some  rate  of  interest. 

Interest,  private  gain,  social  service.  —  Not  much  remains 
to  be  said  with  especial  reference  to  the  demand  side  of  the 
interest  problem.  It  is  clearly  through  the  competitive 
effort  for  gain  that  rents  attach  to  the  goods  that  promise 
gain.     The  renting  or  purchasing  of  gain-promising  proper- 


380  THE  ECONOMICS  OF  ENTERPRISE 

ties  is,  however,  ns  we  have  seen,  only  one  of  the  ways  in 
which  the  inclivi(hial  makes  the  possession  of  suspended 
puR-hasing  power  contribute  to  the  gain  which  ho  lias  in 
purpose.  The  motive  of  the  business  borrower  is  pecuniary 
gain,  the  largest  possible  net  balance  in  terms  of  price.  The 
service  toward  this  end  is  what  capital  means  to  him.  He 
pays  interest  on  borrowed  funds  as  a  step  toward  this  goal. 
These  funds  may,  it  is  true,  be  gainful  to  him  through  his 
investment  of  them  in  instrumental  goods  which  earn  rents, 
or  in  rental  outlays  for  the  term  use  of  such  goods  —  lands 
or  machines  or  what  not.  But  equally  he  may  apply  the 
borrowed  funds,  not  to  land  or  land  rents  nor  to  machines 
or  machine  rents,  but  to  the  payment  of  interest  on  existing 
loans,  to  the  hire  of  labor,  or  to  the  purchase  of  raw  materials. 
Or  with  equal  gain,  he  may  use  his  borrowed  funds  in  adver- 
tising, in  insurance,  in  taxes,  in  acquiring  control  of  patent 
rights,  in  the  buying  of  franchises,  or  in  the  establishment  of 
a  monopoly.  That  productivity  through  investment  which 
has  to  do  with  his  demand  for  funds  and  with  the  rate  at 
which  he  will  hire  them,  is  a  productivity  attaching  to  many 
other  things  than  technological  capital  or  social  capital  or 
equipment  goods. 

Thus  —  be  it  once  more  repeated  —  the  gain  in  question  need 
have  no  sort  of  dependence  upon  any  contribution  to  social  welfare. 
The  enterprise  under  contemplation  may  be  the  equipment  of  a 
gin  palace,  or  of  a  gambling  den,  or  of  an  opium  joint,  or  of  a  counter- 
feiting plant,  or  of  a  dive,  or,  again,  it  may  be  the  establishment  of 
a  Town  Topics  blackmailing  project.  Or  the  outlay  involved  may 
be  purely  for  the  purchase  of  a  tax-farming  contract,  or  for  the 
buying  of  favorable  legislation,  or  for  corrupting  the  police.  Or  the 
enterprise  may  involve  the  purchase  of  the  stock  control  of  some 
competing  factorj'^  or  railroad  with  a  view  to  plundering  it  or  wreck- 
ing it,  or  to  the  end  of  perfecting  a  monopoly,  or  as  a  step  towards 
large  gains  through  short  sales  upon  the  Stock  Exchange.  Neither 
the  thrift  of  abstainers  nor  the  enterprise  of  borrowers  is  necessarily 
conducive  to  social  welfare.  Some  of  each  is  good  and  some  of 
each  is  bad.  Any  adventure  in  the  quest  for  gain,  if  it  require 
loan  fund  capital  in  its  prosecution,  is  a  basis  for  the  borrowing 
of  funds,  and  therewith  of  the  paying  of  interest.  As  the  capital 
fund  which  is  loaned  may  have  been  derived  from  crime  or  exploi- 


THE  LOAN  RATE:    INTEREST  381 

tatioa,  so  it  may  be  borrowed  aiul  used  for  further  purposes  of  crime 
and  exploitation.  The  folly  that  lies  in  the  traditional  doctrine  that 
all  saving  is  good  for  him  who  saves  — ■  that  for  him  thrift  is  always 
wisdom  —  and  the  hideous  error  of  the  traditional  assumption  that 
for  society  capital  is  always  good  in  its  exploitation,  have  already 
received  some  attention  and  may  later  command  still  more. 

Thus  the  demand  for  loan  fund  capital  includes  the  need 
of  funds  for  the  control  of  technological  productive  goods,  but 
covers  a  field  of  activity  indefinitely  wider  and  more  varied. 
And  within  this  demand  must  also  be  included  the  call  for 
consumption  loans  of  diverse  sorts  —  public  and  private, 
wars  and  travel,  uniforms  and  dress  suits,  cannon  and  fire- 
crackers. 

Separate  independent  causes.  —  Several  different  bases  are 
commonly  given  for  the  actual  preference  for  present  purchasing 
power  over  future  purchasing  power :  (1)  spendthrift  borrowing 
—  irrational  present  consumption  at  the  prejudice  of  the  future, 
(2)  rational  consumption  loans,  (3)  the  technological  productivity 
of  wealth  with  passing  time. 

We  have  seen  that  a  premium  of  present  money  or  of  present 
consumables  over  future  money  or  future  consumables  might 
attach  in  a  society  lacking  all  gainful  activities,  e.g.,  among  the 
reservation  Indians  or  among  students  in  the  ordinary  academy 
or  university.  Or,  equally  well,  a  charge  for  keeping  might  occur  — 
negative  interest  — •  as,  for  example,  when  one  pays  at  the  parcel 
room  for  having  Ms  suitcase  guarded,  or  pays  rent  for  a  box  in  the 
deposit  vault,  or,  as  in  mediaeval  times,  the  owners  of  treasure 
paid  the  baron  on  the  crag  to  keep  the  treasure  safe.  That  borrow- 
ing would  take  place  in  the  assumed  society  is  clear  enough,  pre- 
cisely because  men  differ  in  desires,  provisionment,  and  foresight. 
But  no  one  can  be  certain  whether  in  the  balance  the  lending  or  the 
borrowing  disposition  would  be  the  stronger.  Either  might  be. 
The  mere  principle  of  perspective,  whether  the  borrowing  be  wise 
borrowing,  or  unwise  borrowing,  or  both,  is  alone  adequate  to  main- 
tain an  interest  rate,  but  is  never  certain  to  do  it. 

EquaUy  is  the  technological  significance  of  goods  adequate  by 
itself  to  explain  the  existence  of  interest,  even  though  the  situation 
were  one  in  which,  were  all  opportunity  for  gain  absent,  no  premium 
of  present  over  future  dollars  could  attach. 

So,  again,  the  existence  of  durable  consumption  goods  is  alone 
adequate  to  maintain  an  interest  rate.    And,  finally,  the  oppor- 


382  THE  ECONOMICS  OF  ENTERPRISE 

tuuiiy  to  make  j!;;unful  use  of  fuiuls  in  lluancing  predatory  activities 
is  adequate  to  sui")])ort  an  interest  rate,  even  thouf:;h  the  situation 
were  one  in  whieh  labor  were  the  onl,v  productive  fact  in  the  society, 
in  whicli  all  durable  consuinjition  goods  were  entirely  lacking,  and 
in  which,  in  the  absence  of  the  demand  for  funds  for  predatory 
purposes,  no  premium  of  present  over  future  dollars  could  attach. 
In  any  competitive  society  making  use  of  existing  wealth  as  an 
auxiliary  of  production  and  of  private  gain,  and  employing  a  money 
standard,  the  interest  phenomenon  is  inevitable. 

The  mechanism  of  interest  adjustment :  Reservation  rates. 
—  The  fixation  of  the  rate  of  interest  is  a  simple  problem  in 
the  mechanism  of  market  price,  the  demands  for  funds  pre- 
senting themselves  as  offers  of  rates  per  cent,  the  reserva- 
tion prices  being  also  merely  the  minimum  acceptable  rates 
per  cent.  Demand  schedules  and  supply  schedules  may 
easily  be  constructed  illustrative  of  the  process  of  adjustment. 
Schedules  of  this  sort  would  differ  from  those  familiar  in 
earlier  discussions  only  in  presenting  rates  per  cent  on  the 
demand  side  and  on  the  supply  side,  rather  than  prices  per 
item  of  goods.  The  items  of  reservation  in  the  lenders' 
schedule  obviously  report  the  rates  at  which  the  lenders  will 
not  only  refrain  from  spending  their  cash  resources,  but 
will  also  refrain  from  exploiting  them  directly  for  their 
own  gain. 

For  many  minds,  indeed,  the  interest  problem  may  be  simplified 
by  a  device  suggested  in  earUer  pages  (Chapter  V). 

It  was  there  shown  that  with  a  given  number  of  goods  for  sale 
at  whatever  they  will  bring,  the  price  must  necessarily  adjust 
itself  at  a  level  which  will  find  sellers  for  all ;  the  terms  of  the  demand 
schedule  control.  When,  however,  the  sellers  are  not  disposed  to 
sell  at  whatever  best  price  they  can  get,  but,  on  the  contrary,  the 
sales  are  conditioned  on  certain  minimum  prices,  the  problem 
essentially  changes  and  the  equating  price  is  another.  With  the 
appearance  of  these  reservation,  or  refusal,  prices,  the  supply  side 
of  the  equation  appears  to  be  somehow  changed  —  not  less  goods, 
it  is  true,  but  goods  differently  held ;  the  price  must  be  a  different 
and  a  higher  price.  If,  for  example,  the  buyers'  prices  are  10, 
9,  and  8,  with  three  goods  unreservedly  for  sale,  the  price  must  be 
fixed  as  low  as  8,  else  not  all  of  the  goods  will  be  sold.  But  if 
the  sellers  have  reservation  prices  of  10,  9,  and  8,  the  point  of  adjust- 


THE  LOAN  RATE:    INTEREST  383 

merit  must  be  higher.  At  8,  the  price  at  which  the  buyers  will 
take  as  many  as  three,  the  sellers  will  part  with  only  one.  At 
10,  the  price  at  which  all  the  sellers  will  sell,  the  buyers  will  accept 
only  one.  The  price  must  therefore  be  9  with  two  exchanges 
taking  place.  This  earher  discussion  also  showed  that,  in  accurate 
analysis,  the  difference  between  the  two  cases  is  really  a  difference 
in  the  demand  situation  ;  that  the  supply  is  still  three,  but  that  the 
sellers  have  themselves  demands  —  the  supply  schedule  as  ordinarily 
formulated  hiding  demand  elements  ;  that  a  better  statement  would 
be  attained  by  transferring  the  reservation  prices  to  the  demand 
side  of  the  equation,  the  demand  schedule  then  appearing  as  made 
up  of  two  demands  at  10,  two  at  9,  and  two  at  8  (10,  10,  9,  9,  8,  8), 
as  against  an  unreserved  supply  of  three.  The  price  would,  of 
course,  still  adjust  at  9.^ 

By  this  device  of  interpreting  reservation  as  demand  prices, 
it  is  possible  to  regard  the  earning  powers  ascribed  to  one's 
own  wealth  under  his  own  management  as  making  up  a 
part  of  the  entire  demand  for  such  share  of  his  available  pres- 

1  The  Concept  of  a  Market. 

It  has  already  been  noted  how  admirably  this  unmasking  of  the 
demand  elements  in  the  prices  of  the  supply  schedule  fits  into  and 
illuminates  the  analysis  of  cost  of  production.  But  the  service  is 
perhaps  even  greater  in  helping  to  define  and  clarify  the  concept  of 
a  market.  For  example  :  is  the  market  for  wheat  one  world  market, 
or  the  Chicago  market,  or  the  Liverpool  market?  Or  is  it  all 
three,  and  an  indefinite  number  more? 

It  is  at  any  rate  clear  that  the  Chicago  market  and  the  Liver- 
pool market  are  not  quite  distinct  and  independent ;  the  circles 
of  different  markets  overlap  and  intercept  —  the  more  perplex- 
ingly  as  the  more  markets  are  recognized.  The  explanation  is 
to  be  sought  in  the  fact  that  the  supply  or  demand  of  any  market 
is  potentially  supply  or  demand  in  any  other,  and  that,  with  any 
changes  in  the  relative  situations,  these  potentials  quickly  become 
actuals.  Were,  indeed,  charges  for  transportation  and  for  handling 
canceled,  all  the  world  would  become  one  simple  market.  And,  in 
point  of  fact,  all  the  world  is  now  one  market,  but  a  market  with 
varying  reservation  prices  upon  the  varying  supplies  under  the 
varying  conditions  of  transportation.  Theoretically,  indeed,  the 
market  is  anywhere  and  everywhere,  if  only  there  are  recognized 
the  appropriate  demand  and  supply  schedules.  Just  as  the  axis 
of  the  earth  has  been  asserted  to  stick  out  in  every  New  England 
village,  so  the  world  market  is  at  every  place,  only  that  in  most 
places  little  business  is  doing.  The  locations  of  the  great  wheat 
marts  of  the  v/orld,  the  busy  markets,  are  determined  by  the  con- 


384  THE  ECONOMICS  OF  ENTERPRISE 

ent  purchasing  power  as  is  not  allotted  to  purposes  of  im- 
mediate consumption.  The  individual's  surplus  over  the 
needs  of  immediate  use  is,  then,  distributed  between  durable 
consumption  goods,  gainful  investment  under  his  own  super- 
vision, and  loans  to  other  men  for  use  in  any  one  of  the  five 
possible  ways :  (1)  immediate  consumption  goods,  (2)  con- 
sumption goods  postponed  in  use,  (3)  durable  consumption 
goods,  (4)  durable  investment  goods,  (5)  loans  to  others  — 
in  which  last  case  the  first  borrower  is  a  mere  intermediary 
in  working  out  the  final  distribution  of  the  aggregate  loan 
fund. 

So  viewing  our  problem  we  are  able  to  regard  the  interest 
rate  as  the  point  at  which  the  supply  of  the  available  wealth 
of  investing  or  lending  individuals  —  mostly  current  income 
—  is  distributed  between  present  uses  on  the  one  hand  as 
against  those  uses  which,  to  their  investors  or  lenders,  present 


ditions  of  production,  of  transportation,  and  of  consumption  ;  they 
are  the  points  at  which  purchasers,  disposed  to  pay  high  prices 
there,  relatively  to  the  asking  prices,  are  met  by  sellers  disposed  to 
sell  low  there,  relatively  to  the  demand  prices. 

This  analysis  lends  further  emphasis  to  the  already  familiar 
doctrine  that  any  item  anywhere,  say  of  wheat,  is,  at  its  appropriate 
reservation  price,  an  item  of  supply  anywhere.  So  any  item  of 
price-paying  disposition  is  a  demand  price  anywhere,  allowance 
being  made  for  the  exchange  rates  bearing  upon  money  at  that 
point.  The  supply  of  any  particular  good  is  all  the  goods  there 
are,  no  matter  at  what  price  held.  The  demand  for  the  good  is 
all  the  dispositions  there  are  to  pay  a  price  to  get  the  good  or  to 
refuse  a  price  to  keep  it. 

Computing,  therefore,  as  included  within  the  reservation  price 
of  any  market,  all  the  different  transportation  charges  necessary  to 
the  delivery  of  all  the  different  bushels  of  wheat  in  the  world  to  that 
market,  it  is  quite  defensible  to  compute  the  aggregate  world  price 
of  the  world  crop  of  wheat  in  that  market  as  the  number  of 
items  in  the  world  times  the  price  per  bushel.  Those  bushels 
of  supply  not  actually  transferred  have  each  its  reservation  price 
in  that  market.  Theoretically  all  are  present,  but  some  do 
not  sell  precisely  because  they  are  reserved  —  bid  in  —  at  the 
going  price. 

Thus  it  is  purely  an  academic  or  imaginary  rather  than  an  actual 
problem  to  surmise  what  the  whole  supply  would  actually  sell 


THE  LOAN  RATE:    INTEREST  385 

themselves  as  future  uses.  The  consumption  demands  of 
borrowers  make  up  part  of  the  aggregate  borrowing  demand, 
and  by  this  very  fact  rank  with  reference  to  the  lenders  as 
uses  future  for  them. 

The  pain-pleasure  theory  of  interest.  —  It  should  now  be 
evident  that  all  attempts  to  explain  the  rate  of  interest  as 
the  point  of  equation  between  the  pains  or  sacrifices  of  lenders 
and  the  pleasures  or  benefits  or  gains  of  borrowers,  or  to 
explain  the  rate  of  interest  as  a  rate  of  preference  for  early 
enjoyable  income  over  late  enjoyable  income^  must  rest 
ultimately  upon  the  assumption  that,  for  the  purposes  of 
the  problem,  society  may  rightly  be  regarded  as  an  individ- 
ual and  organic  thing.  For,  after  all,  how  arrive  at  an 
equality  between  pain  on  the  one  side  and  pleasure  on  the 
other  side,  unless  the  pain  and  the  pleasure  pertain  to  the 
same  individual?  And  whose  is  the  preference  when  one 
of  the  incomes  is  chosen  against  another?  The  actual  so- 
ciety is  a  competitive  society.  And  for  a  competitive  so- 
ciety it  must  be  recalled  (1)  that  the  interest  phenomenon 
points  solely  to  a  preference  for  present  money  over  future 
money,  and  (2)  that  the  saving  has  to  do  with  some  individuals 
and  the  paying  with  other  individuals  and,  therefore,  that 
neither  the  impatience  of  the  different  lenders  relative  to  one 
another,  nor  the  gains  and  advantages  of  the  different  bor- 
rowers relative  to  one  another,  are  to  be  made  simple  and 
homogeneous  quantities.  And  still  clearer  is  it,  that  in 
view  of  all  the  different  lenders  on  the  one  side  and  of  all 

for,  were  all  to  be  forced  upon  the  market  at  whatever  price  were 
necessary  to  market  all.  This  is  really  to  ask  what  effects  would 
follow  the  cancellation  of  the  actual  reservation  prices. 

Essentially,  however,  this  is  what  is  done  by  certain  economists 
who  have  argued  that  there  is  no  such  thing  possible  as  a  world 
market  price  for  the  entire  supply  of  any  commodity. ^  Precisely 
what  would  happen  if  existing  conditions  were  absent  —  if  the 
holders'  demands  were  canceled  —  one  may  not  easily  conjecture, 
though  clearly  the  price  must  fall. 

^  See,  for  example,  "  Some  Limitations  of  the  Value  Concept,"  Allyn  A, 
Young,  Quarterly  Journal  of  Economics,  Vol.  XXV,  No.  3  (May,  1911), 
p.  409. 

2c 


386  THE  ECONOMICS  OF  ENTERPRISE 

the  different  borrowers  on  the  other  side,  no  adjustment  can 
possibly  be  reached  expressing  any  general  or  aggregate  rate 
of  preference  for  j^resent  goods,  or  present  incomes,  or  present 
money,  as  over  against  some  corresponding  quantity  or 
item  or  thing  in  the  future. 

Proposed  equation  impossible.  —  And  equally  obvious 
is  it  that  no  protest,  impatience,  or  sacrifice  of  any  one  in- 
dividual as  lender  can  be  equated  against  the  advantages 
or  gains  of  some  other  one  individual  as  borrower.  As  the 
lenders  are  many  and  different,  and  as  the  borrowers  are 
many  and  different,  so  are  the  sacrifices  different  and  the  ad- 
vantages different.  The  difficulty  here  with  the  social  organ- 
ism interpretation  is  precisely  parallel  to  the  earlier  difficulty 
of  making  all  the  different  pains  of  different  producers  of 
goods  homogeneous  and  equal,  and  all  the  different  utilities 
of  different  purchasers  homogeneous  and  equal,  and  there- 
upon equating  this  aggregate  of  costs  against  this  aggregate 
of  utilities  into  a  price  expressing  either  a  marginal  sacrifice 
or  a  marginal  utility.  The  mere  fact  that,  precisely  as  there 
are  both  sellers  and  buyers  variously  distant  from  the  margin 
in  the  fixation  of  price,  so  there  are  borrowers  and  lenders 
variously  distant  from  the  margin  in  the  fixation  of  the  rate 
of  interest,  vetoes  the  possibility  of  resolving  the  interest 
rate  into  some  social  or  aggregate  balance  of  preference  for 
early  enjoyable  income  over  late  enjoyable  income.  And 
more  than  this :  even  with  the  marginal  lender,  nothing  is 
to  be  inferred  as  to  the  degree  of  his  sacrifice  in  saving  or 
of  his  advantages  in  lending,  more  than  that  these  two  quan- 
tities, each  of  unknown  absolute  magnitude,  are  yet  equal 
one  to  the  other.  Still  less  is  there  warrant,  either  in  con- 
tracts of  sale  or  contracts  of  lending,  for  the  assumption  that 
the  magnitudes  involved  are  equal  for  the  two  parties  to  the 
transaction.  The  only  equality  to  be  asserted  is  that  to 
the  marginal  lender  the  advantages  of  lending  are  equal  to 
the  disadvantages,  and  that  to  the  marginal  borrower  the  dis- 
advantages of  borrowing  are  equal  to  the  advantages.  There 
is  no  equivalence  of  the  disadvantages  to  the  lender  with  the 
advantages  to  the  borrower,  nor  any  equality  between  the 
importance  to  the  lender  of  the  present  income  which  he 


THE  LOAN  RATE:    INTEREST  387 

lends  and  the  importance  to  the  borrower  of  the  future  in- 
come which  he  returns. 

Social  explanations.  —  But  the  final  objection  to  any  possible 
way  of  explaining  interest  from  the  point  of  view  of  the  social 
aggregate  is  in  the  fact  that  the  productivity  which  motivates  the 
borrowing  of  funds  is  productivity  only  in  the  sense  of  service  for 
private  acquisition.  Anything  is  productive  to  the  borrower 
which  makes  for  an  increment  of  price  to  him.  The  borrowed 
purchasing  fund  may,  indeed,  be  directed  into  machinery,  farms, 
or  raw  materials,  —  into  lines,  that  is  to  say,  of  technological  and 
social  productivity,  —  but,  equally  well,  it  may  not.  The  social 
organism  doctrine  is  a  doctrine  exclusively  for  optimists.  In 
point  of  fact,  any  adventure  promising  a  gain  in  terms  of  price 
may  contribute  to  the  demand  for  loanable  funds,  and,  as  based 
upon  it,  there  may  emerge  an  interest  rate.^ 

^  The  Social  Organism. 

The  difference  between  an  organization  and  an  organism  is 
hard  to  define,  simply  because  we  do  not  know  what  life  is.  An 
organism  is  an  organized  unit  possessed  of  the  mysterious  thing 
that  we  call  life  —  a  fact  and  a  concept  from  the  field  of  biology. 

The  distinction  between  a  social  organization  and  a  social  organ- 
ism is  the  same  distinction  :  a  social  organism  must  be  a  something 
in  which  the  principle  of  life  is  the  basis  of  the  organization.  Social 
organizations  there  are  without  limit.  Each  of  us  may  be  a  mem- 
ber at  large  in  an  indefinite  number  —  the  family,  the  church  in  its 
different  branches,  the  State  in  its  different  subdivisions,  the 
Masons,  the  Odd  Fellows,  the  Royal  Society,  the  Academy,  the 
Anti-Tuberculosis  League,  the  International  Peace  Societ3%  the 
reading  circle,  the  Club,  and  the  football  team  —  perhaps  also  in 
the  world  and  the  Universe.  Are  all  of  these  also  organisms  in  the 
sense  of  things  themselves  alive,  rather  than  merely  made  up  — 
some  of  them  —  of  things  which  are  separately  alive  ? 

They  may  be  :  how  can  we  know,  not  knowing  what  life  is  ? 
The  biologists  do  not  so  declare  them ;  they  see  no  evidence  of  the 
centralizing,  coordinating,  organizing  activity  of  that  strange 
fact  called  life.  Each  of  these  organizations  appears  to  lack  that 
sort  of  unity  which  we  call  individuality.  But  it  may  none  the 
less  be  there.  In  a  family  of  father,  mother,  and  two  children, 
there  may  be,  unknown  to  any  member  of  it,  still  another  member, 
a  fifth  individual,  the  family  itself.  There  may  be,  indeed,  two  or 
three  or  a  dozen  of  these  others  ;  how  shall  we  deny  it  ?  Unproved, 
it  is  also  undisproved  —  and  undisprovable.  We  do  not  know. 
Likewise,  how  can  we  assert  it  ?     For  anything  that  we  know  to 


388  THE  ECONOMICS  OF  ENTERPRISE 

This 'chapter  should  have  made  clear  that  interest  is  one 
reward  for  waiting,  but  that,  in  its  strict  technical  sense,  it 
is  only  one  of  many  rewards ;  that  all  rents  or  services  from 

the  contrary,  every  atom  in  the  Universe  may  have  each  its  sep- 
arate psychic  aspect  and  activities  —  herein  resting  the  secret  of 
chemical  affinity  :  their  souls  are  drawn  to  one  another  or  are  seek- 
ing their  mates.  But  is  it  science  to  assert  it  or  to  assume  it  ? 
And  have  we  thereby  explained  anything  ?  One  mystery  is  not 
the  competent  solution  of  another.  This  sort  of  explanation  is 
merely  pseudo-explanation  —  faith  or  metaphysics  or  guess.  In 
similar  jargon,  principles  are  sometimes  said  to  be  working  them- 
selves out,  or  to  be  engaged  in  the  process  of  realizing  themselves. 
But  talk  like  this  means  merely  that  some  unknown  X  is  doing 
something  or  other.  We  recall  from  Goethe  "Men  often  think,  if 
only  words  they  hear,  that  therewith  goes  material  for  thinking." 
So  also  Gilbert  and  Sullivan  : 

"Her  gentle  spirit  rolls 
Through  the  melod}^  of  souls  ;  — 
Which  is  doubtless  very  pretty. 
But  I  don't  know  what  it  means." 

Nevertheless  it  may  roll.  It  may  be  that  the  Universe,  as  a  unified 
organized  thing,  is  alive  in  every  detail  —  an  organism  in  the 
biological  sense  —  as  Pan-psyehism  declares  to  be  the  ultimate 
truth.  Surely  somewhere  in  the  Universe  all  that  there  is  in  it 
has  its  explanation  —  if  only  we  could  find  it.  But  the  mere 
assertion  of  this  large  fact  —  taking  it  as  a  fact  —  is  not  an  ex- 
planation of  all  the  intermediate  subordinate  facts.  After  all, 
what  is  explanation  in  our  human  sense  ?  We  understand  not  one 
whit  the  better  any  single  item  out  of  a  great  whole,  by  discovering 
that,  taking  it  as  a  whole,  it  stands  for  us  as  merely  one  gigantic 
flux  and  pow-wow.  To  assert  this  is  rather  so  far  a  confession  of 
our  total  lack  of  understanding.  The  social  organism  people 
greatly  need  to  master  the  distinction  between  an  explanation  and 
a  mystery.  It  is  not  the  solution  of  a  problem  to  give  it  up,  nor 
the  unriddling  of  your  riddle  to  confess  that  you  yourself  have  no 
solution. 

Good  rhetorical  usage  does  doubtless  permit  us  to  speak  of 
human  beings  in  aggregates,  with  the  use  of  a  singular  verb :  the 
Committee  is  agreed ;  the  group  disperses ;  Congress  votes ;  the  army  is 
marching.  We  may  talk  of  public  opinion,  esprit  de  corps,  the  spirit 
of  the  times.  But  probably  no  one  understands  this  collective 
use  to  imply  or  to  assume  organic  unity. 

Equally  well  we  may  say  that  the  army  are  marching,  the  com- 


THE  LOAN  RATE:    INTEREST  389 

durable  goods,  whether  farms,  franchises,  patents,  instru- 
mental goods,  or  durable  consumption  goods,  are  rewards  for 
waiting ;  that  since  the  lender  of  any  good  is  an  abstainer,  if 

mittee  are  agreed  (with  one  another),  the  proper  use  depending  on 
whether  the  group  is  taken  as  a  whole  or  by  its  constituent  units ; 
the  crew  was  exhausted  or  the  crew  were  exhausted  —  accordingly 
as  we  mean  one  thing  or  the  other.  Though  the  act  or  the  situa- 
tion is  really  one  of  each  individual  separately,  there  is  no  actual 
ambiguity  or  uncertainty  involved  in  saying  that  the  battalion 
is  eating  dinner.  The  activities  are  similar,  roughly  simultaneous, 
and  are  thought  of  in  block.  True,  one  man  eats  rapidly,  another 
slowly,  some  little,  and  others  much,  and  a  few  sick  ones  not  at  all, 
—  but  the  expression  serves,  and  implies  its  own  limitations  of 
accuracy.  And  so  of  an  army,  when  we  say  that  it  marches,  no 
doubt  is  even  faintly  suggested  that  each  one  does  his  own  walking, 
works  his  own  muscles,  uses  up  his  own  tissue,  and  that  presumably 
many  are  halt,  some  falling  out  by  the  wayside,  while  still  others 
limp,  and  some  swear.  But  no  one  of  these  differences  matters 
for  the  purposes  of  the  thought  in  mind.  True,  the  expression  is 
in  strictness  inaccurate,  were  any  perversity  bent  on  misinter- 
preting it.  But  when  it  comes  to  asserting  that  the  army  is  brush- 
ing its  teeth  or  has  stubbed  its  toe,  there  is  obvious  difficulty. 

And  for  purposes  of  the  accurate  analysis  of  the  price  problem, 
there  is  really  the  same  difficulty  in  thinking  of  a  social  coldness 
or  hunger  or  desire  or  pleasure  or  pain.  In  the  price  problem,  the 
need  is  to  understand  precisely  how  the  particular  individuals 
arrive  at  their  respective  demand  prices.  There  is  no  one  single 
homogeneous  utility  nor  any  one  single  aggregate  demand  price. 
Utility,  for  the  purposes  of  the  analysis,  is  an  individual  category. 
Even  in  public  finance,  the  tax  costs  and  the  public  services  are 
ultimately  individual. 

It  must,  at  any  rate,  be  clear  that  if  society  is  an  organism  at 
all,  it  is  an  organism  of  a  very  low  order  —  like,  say,  the  jellyfish. 
But  it  is  only  to  the  higher  orders  of  organisms  that  mind  and 
thought  and  purpose  and  will  can  be  confidently  ascribed.  To 
interpret  social  phenomena  in  any  organic  sense  adapted  to  explain 
them,  as  connoting  judgment,  appraisal,  comparison,  approval, 
condemnation,  —  the  social  organism  must  take  on  the  attributes 
of  personality. 

So  far  as  we  can  make  out,  personality  implies  a  distinct,  sepa- 
rate, and  centralized  psychic  unity,  in  which  at  least  four  things 
are  essential  —  thought,  will,  consciousness,  and  memory.  Try 
to  make  out  what  the  you  would  be,  lacking  any  one  of  these. 
What  makes  you  you?  Unconsciousness  means  the  suspension 
of  individuality.     Perhaps  thought  and  will  are  not  quite  so  clearly 


390  THE  ECONOMICS  OF  ENTERPRISE 

not  by  foregoing  the  direct  use  of  his  own  wealth,  then  by 
foregoing  the  sale  price  of  it,  all  rental  and  service  incomes 
are  therefore  abstinence  incomes ;  that  here  once  more  the 
distinction  between  hmd  and  other  instrumental  goods  breaks 

essential.  But,  obviously  enough,  there  is  no  personality  without 
memory  —  the  cement  that  binds  together  states  of  consciousness 
which  would  otherwise  be  unrelated.  What  makes  the  you  of  the 
present  moment  the  same  person  with  the  you  of  a  half  year  ago  ? 
Dual  personality  is  a  duality  of  independent  memory  systems. 
If  in  the  ne.xt  life  we  are  to  remember  nothing  of  this  one,  it  can- 
not greatly  matter  whether  we  are  to  live  again  or  not ;  immor- 
tality, on  terms  of  entire  forgetfulness,  would  be  a  valueless  gift  — 
not  the  continued  life  of  one,  but  the  birth  of  some  one  else.  So 
far,  then,  as  we  know,  there  is  no  social  organism  in  the  sense  of  a 
personality  fulfilling  this  fourfold  test  —  fulfilling,  indeed,  any  one 
of  the  four  tests. 

Not  the  less,  however,  must  it  be  frankly  admitted  that  a  mere 
hypothesis,  as  sheer  assumption,  if  it  offer  a  working  explanation 
of  facts  which  otherwise  must  go  without  explanation,  becomes 
thereby  something  more  than  mere  hypothesis  or  assumption. 
That  it  fits  the  facts,  harmonizes  them,  unifies  them,  makes  them 
consistent  when  nothing  else  will,  is  some  inductive  support  of 
its  truth.  On  these  terms,  any  hypothesis,  however  tentative, 
may  stand,  pending  the  coming  of  something  better.  The  organic 
hypothesis  may,  in  truth,  be  so  far  better  than  nothing.  But  not 
much  better ;  it  leaves  us  in  the  unsatisfactory  position  not  only 
of  affirming  that  of  which  we  can  have  no  knowledge  —  which  is 
bad  —  but  of  affirming  a  thing  of  which  we  also  affirm  that  we  can 
never  have  any  knowledge  — -  which  is  worse. 

But  will  the  social  organism  hypothesis  meet  this  test  of  sole 
unifier  of  the  facts  ?  Are  there  other  possible  explanations  ?  Are 
we  yet  compelled  to  resort  to  these  devices  of  speculation  and 
quasi-explanation  ?  It  is  at  any  rate  a  crass  abuse  of  hypothesis 
if  it  be  made  to  stand  as  an  obstacle  in  the  way  of  the  search  for 
an  explanation  in  terms  of  what  is  already  known.  A  hypothesis 
can  never  be  employed  as  the  refutation  of  any  offered  explanation, 
as  answer  to  it,  or  defense,  or  objection ;  it  holds  its  place  by 
tolerance  —  by  the  mere  negative  fact  that  nothing  else  is  available. 
It  has  no  evidential  quality  or  argumentative  validity.  It  is 
rather  a  standing  promise  of  abdication  in  favor  of  anything  that 
can  make  an  affirmative  case.  It  is  an  invitation  and  an  exhorta- 
tion to  continued  research  and  to  constructive  effort. 

Does,  then,  the  social  organism  hypothesis  fit  the  facts  of  a 
competitive  society  ?  It  might  do  well  enough  —  if  nothing  else 
would  —  for  the  collectivist  or  socialistic  form  of  organization ; 


THE  LOAN  RATE:    INTEREST  391 

down,  together  with  the  distinction  between  rent  and  interest 

—  land  incomes  and  other  incomes  —  in  relation  to  cost  of 
production;    that  all  the  different  incomes  accruing  from 

but  does  it  express  the  divisions  and  antagonisms  of  interest  and 
activity  characteristic  of  a  competitive  organization  —  the  preying 
of  cell  on  cell  ?  When,  at  the  equation  of  market  price,  a  bushel 
of  wheat  is  exchanging  against  a  dollar  of  gold,  shall  we  abandon 
the  demand  schedule  with  all  of  its  different  items  of  offer  of  gold, 
and  the  supply  schedule  with  its  different  reservation  prices  — 
each  item  of  price  offer  and  of  supply  having  its  distinct  explanation 
in  individual  comparisons  and  individual  choices  of  alternatives 

—  and  shall  we,  pronouncing  all  these  unactual  and  inadequate, 
a  hopeless  quest,  betake  ourselves  to  the  explanation  that  society, 
in  its  organic  unity,  has  appraised  gold  separately  as  a  value,  and 
wheat  separately  as  a  value,  and  has  found  them  equal  as  values, 
so  that  now  an  equality  in  exchange  relations  can  occur  ?  Or, 
if  a  football  coach  is  accorded  a  salary  of  a  thousand  dollars  a 
month  and  an  instructor  in  Economics  a  salary  of  a  thousand  a 
year,  shall  there  be  offered,  as  ultimate  and  final  explanation,  the 
statement  that  society,  the  world  at  large,  or  the  Universe,  organi- 
cally approves  or  appraises  or  values  one  service  twelve  times  as 
highly  as  the  other  ?  And  if  a  highway  robber  gains  $200  from 
ten  minutes  of  daring  and  a  cellar  digger  two  dollars  for  600  minutes 
of  boredom,  it  will  be  evident  that  society  appraises  the  pains  and 
waitings  of  the  one  at  a  worth  of  $20  a  minute  against  a  worth  for 
the  other  of  i  cent  a  minute.  And  when  the  monopolist,  by  pro- 
ducing half  as  much  product,  gets  twice  as  much  gain,  it  will  be 
clear  that  society  evaluates  the  half  at  twice  as  much  as  the  whole 

—  the  interference  with  production  at  double  the  contribution  to 
production.  There  should  evidently  be  somewhere  a  social  insane 
asylum  in  which  to  confine  the  social  organism.  So  when  the 
lawyer,  skillful  in  advising  his  clients  how  legally  to  do  illegal  things, 
gets  especially  generous  fees,  this  shall  be  the  proof  that  society 
finds  his  services  to  be  highly  beneficent.  When  canned  poison 
brings  20  cents  per  can  and  canned  corn  half  as  much,  this  shall  be 
taken  to  be  the  idiotic  judgment  of  the  aggregate  social  idiot.  By 
similar  devisings,  also,  are  to  be  explained  the  dear  cheapnesses, 
the  adulterations,  the  lying  advertisings,  the  prostitutes,  the  vice 
trusts,  the  gambling  syndicates,  the  purchased  judicial  honor,  the 
offices  sold  at  a  price,  the  elections  bought  by  money  for  gain,  the 
speculations,  the  sinecures  and  the  graft ;  society  is  organically 
plundering  its  organic  self,  buying  itself,  selling  itself,  lying  to 
itself,  poisoning  itself,  making  (part  of)  itself  rich  at  the  expense 
of  (part  of)  itself.  And  all  these  market  prices  and  all  these  indi- 
vidual gains  shall  stand  —  by  proof  of  hypothesis  —  as  the  ap- 
praisals of  the  racial  judgment. 


392  THE  ECONOMICS  OF  ENTERPRISE 

possessions  \\\{\\  passing  time  are  to  be  termed  interest,  so 
soon  as  the  source  of  the  income  is  expressed  as  a  money  value, 
a  price  item,  antl  the  income  expressed  as  a  rate  per  cent  upon 
the  price  of  the  source;  that  as  the  fund  derived  from  the 
sale  of  a  farm  may  lie  invested  as  an  item  of  loan  fund,  which 
now  earns  interest  m  place  of  the  rent  which  the  farm  earned 

But  to  many  men  who  accept  the  point  of  view  of  the  social 
organism,  tlie  foregoing  criticism  will  appeal  as  mere  travesty. 
They  mean  none  of  the  things  charged  against  them.  They  do 
not  take  society  to  be  a  great  animal  —  either  male  or  female, 
or  both  or  neither.  All  that  they  moan  is  that  men  in  society  are 
in  mutual  relations  of  influence  and  interaction,  that  each  man 
has  truly  his  individual  tastes,  choices,  desires,  demands,  costs, 
sacrifices,  hopes  and  fears,  but  not  separately  in  the  sense  that 
any  one  is  free  from  the  influence  of  others  and  of  their  shaping 
power  —  free,  that  is,  from  the  social  milieu  in  which  he  has  lived. 
We  want  clothing  as  much  because  other  people's  glances  beat 
upon  us  as  that  the  sun's  rays  scorch  us.  We  desire  the  admiration, 
the  approval,  the  fear,  and  the  envy  of  our  fellows.  Of  this  sort 
may  be  most  of  the  significance  of  palaces,  carriages,  champagne, 
or  neckties.  We  never  act  or  think  or  feel  in  isolation.  We 
are  individuals  in  a  society.  In  a  sense,  therefore,  the  individual's 
desires  are  social  in  their  derivation :  Utility  to  the  individual  is 
a  social  utility. 

That  so  much  as  this  is  true  must  be  admitted ;  and  let  it  forth- 
with be  added  that  no  one  ever  doubted  it.  But  when  one  has  a 
desire  —  no  matter  whence  it  came  —  it  is  his  desire,  and  not  the 
desire  of  the  world  at  large.  No  matter  when  or  where  or  how  you 
get  hungry,  it  is  now  your  hunger,  and  not  the  hunger  of  the  fresh 
air  or  the  long  walk  that  gave  it  to  you.  It  majs  indeed,  be  due 
to  the  fact  that  you  have  seen  others  eating.  Even  the  feeling  of 
being  cold  may  be  social  in  its  occasion.  But  your  cold  is  not 
thereby  a  social  cold.  You  may,  in  truth,  feel  so  much  the  colder 
as  you  see  the  people  about  you  the  more  snug  and  smug.  Your 
cold  does  not  then  translate  into  a  social  warmness.  Your  piety, 
again,  may  have  been  taught  you ;  but  it  is  not  now  the  piety  of 
your  parents,  or  of  the  neighborhood,  but  only  of  yourself  —  even 
as  a  breakfast  to  which  all  climates  have  contributed  is  one  man's 
breakfast  rather  than  an  international  breakfast.  Perhaps  your 
brother's  impiety  has  come  as  a  reaction  against  the  overpiety 
of  his  neighbors ;  but  it  is  not  now  either  a  social  piety  or  a  social 
impiety.  If  you  get  the  bubonic  plague  via  some  international 
rat,  it  will  not  be  Asia  or  the  rat  or  the  world,  but  you  that  will  be 
sick ;  and  if  you  die,  the  funeral  rites  will  be  said  over  you.  The 
resultant  from  a  parallelogram  of  forces  is  not  all  of  the  contribut- 
ing directions  at  onee,  but  one  definite  new  direction. 


THE  LOAN  RATE:    INTEREST  393 

before,  so  a  tenant  may  pay  as  rent  on  land  the  same  sum  that, 
as  purchaser  upon  mortgage,  he  might  have  paid  as  interest, 
and  the  same  sum  that  as  borrower  he  might  have  paid  upon 
the  f mids  with  which  to  purchase  the  farm ;  that  distinctions 

Note,  finally,  how  far  the  interpretation  of  the  social  organism 
must  go.  If  the  fact  that  one's  tastes  and  habits  are  copied  from 
other  men  makes  these  tastes  and  habits  not  his  but  theirs ;  if 
the  mists  floating  inland  from  the  sea  are  still  sea,  the  grain  from 
the  soil  still  soil,  the  soil  that  was  rock  still  rock,  the  skippers  in 
the  cheese  still  cheese ;  if  origin  and  genesis  not  merely  shape  and 
determine  what  a  man  is,  but  also  define  him  in  terms  of  them- 
selves, make  him  them,  absorb  him,  —  we  shall,  by  this  route, 
arrive  not  at  social  estimates,  social  desires,  and  social  values, 
but  at  cosmic  judgments,  cosmic  estimates,  and  cosmic  valuations. 
For  to  owe  contemporaries,  truly,  is  due  much  of  the  shaping  of 
us ;  but  still  more  is  due  to  the  generation  next  preceding,  or  to  all 
the  endless  past.  Many  also  of  our  individual  aims  and  activities 
have  in  view  future  human  beings  —  our  descendants  or  the  race 
in  general,  their  admiration,  their  approval,  or  their  welfare.  The 
social  organism  in  the  sense  of  the  directive  society  must  include  all 
human  generations  of  all  races  and  of  all  times,  past,  present,  and 
to  come. 

But  if  our  quest  is  for  origins  —  for  directive,  determining,  shap- 
ing facts,  we  must  include  more  than  the  influence  of  human  as- 
sociations past  and  present.  We  shall  include  as  well  all  the  past 
environment  and  no  small  part  of  the  future  —  the  storms  of 
the  past  centuries  and  the  storms  that  are  yet  to  be  —  the  wild 
animals  that  we  have  made  our  prey  and  the  wild  animals  that 
have  made  us  their  prey  —  the  malevolent  microbes  and  the  benef- 
icent —  the  pestilences  that  have  walked  and  are  walking  by 
night,  and  the  fevers  of  primitive  and  of  present  noondays  —  all 
past  climates  and  all  past  suns  and  all  seas  and  rains. 

Nor  are  we  to  forget  that  other  suns  and  the  most  distant  stars 
are  raining  their  beams  upon  us  and  prompting  us  to  poetry  and 
romance  and  to  scientific  moonshine  —  and  have  been  at  it  for 
countless  generations,  and  will  remain  at  it  for  some  time  yet.  It 
follows  that  all  the  past  and  the  future  of  the  solar  system  and  of 
all  the  stars  in  the  infinite  spaces  are  within  the  causal  complex. 
There  is  nothing  for  it  but  to  learn  to  think  and  talk  of  the  social 
cosmos.  And  once  having  learned  to  think  clearly  in  this  emphasis, 
we  shall  shortly  have  the  logical  insight  to  see  that  the  word  social 
is  mere  tautology  ;  we  shall  talk  simply  of  the  cosmos.  And  hav- 
ing found,  as  our  great  conclusion,  that  all  things  are  explained 
by  the  cosmos,  we  shall  —  perhaps  —  return  to  our  place  of  be- 
ginning, ready  to  fare  forth,  unincumbered,  in  the  search  for  real 
explanations. 


394  THE  ECONOMICS  OF  ENTERPRISE 

regarding  the  origin  of  different  possessions  have  no  relation 
to  the  price  of  the  possessions,  to  the  abstinence  involved 
in  holding  them,  to  the  uses  which  are  made  of  the  properties, 
or  to  the  rates  of  return  which  they  render  on  the  invest- 
ments ;  that,  as  salable  by  the  owner,  every  durable  good 
must  represent  a  waiting  by  him,  no  matter  whether  he  rents 
the  property  or  uses  it  directly  himself ;  that  if  the  problem 
of  origins  really  concerned  the  o^vner,  it  could  in  many  cases 
never  be  solved  by  him,  nor  always  trustworthily  by  any 
one  else. 

It  is  also  clear  that  the  thing  that  is  lent  in  the  capital 
market  is  suspended  purchasing  power,  and  that  the  absti- 
nence that  interest  rewards  is  the  abstinence  involved  in 
lendmg  this  purchasing  power ;  that  all  other  possessions 
lent  for  hire  command  only  rents  —  a  form  in  which  the  re- 
turn is  not  expressed  as  a  per  cent,  per  dollar,  per  period ; 
that  there  is  in  neither  of  these  abstinences  any  pain  or  any 
necessary  connection,  direct  or  indirect,  with  painful  expe- 
rience ;  that  therefore  interest  cannot  express  any  equality 
of  the  lender's  pains  to  the  borrower's  pleasures ;  that  there 
is,  in  fact,  no  equality  of  anything  involved  in  the  interest 
relation  excepting  an  equality  of  the  ratios  which,  for  the  mar- 
ginal lenders  and  borrowers  respectively,  must  exist  between 
the  advantages  and  the  disadvantages  of  the  interest  rela- 
tion. 

But  it  has  been  shown  that  notwithstanding  all  this,  ab- 
stinence has  to  do  with  interest  as  one  of  the  influences  limit- 
ing the  amount  of  purchasing  power  in  society  available  for 
future  purposes.  Every  abstainer  has  his  separate  marginal 
abstinence  from  present  consumption,  a  margin  affected  on  the 
one  hand  by  the  degree  of  the  pressure  of  his  present  needs, 
and  on  the  other  by  the  advantages  anticipated  from  the 
savings.  The  point,  or  margin,  to  which  his  saving  will  be 
carried,  and  the  volume  of  his  funds  laid  aside  from  present 
consumption,  must  be  affected  by  the  individual's  total  of 
income,  the  pressure  of  his  present  need,  his  prospect  of  future 
income,  and  his  prospect  of  future  need.  The  demands  upon 
his  present  revenue  are,  then,  (1)  his  immediate  needs  for 
present  consumption,  (2)  his  opportunities  for  investment  in 
durable  consumption  goods,  or  in  durable  production  goods 
or  in  gainful  business  generally,  (3)  the  demands  of  others, 
for  their  immediate  consumption,  (4)  the  demands  of  others 
for  any  of  the  three  forms  of  income-bearing  investment. 


THE  LOAN  RATE:    INTEREST  395 

But  fundamental  to  all  of  these  different  uses  is  the  amount 
of  the  present  fund  ;  how  far  the  various  demands  upon  it  for 
future  uses  will  absorb  it  must  depend,  in  part,  but  only  in 
part,  upon  the  strength  of  his  present  needs,  but  in  equally 
great  part  upon  the  advantages  anticipated  from  the  future 
uses.  It  is  thus  again  evident  that  durable  consumption 
goods  are  capital ;  they  absorb  present  income  for  future  pur- 
poses ;  they  promise  returns  in  valuable  future  services, 
which  returns,  when  expressed  in  terms  of  price  upon  an  in- 
vestment of  price,  arrive  at  the  typical  interest  statement. 

It  has  also  been  shown  that,  while  the  "impatience,"  or 
abstinence  temper  in  human  nature  might  or  might  not,  in 
given  conditions,  suffice  to  establish  a  market  rate  of  interest, 
the  existence  of  durable  production  goods  or  of  other  oppor- 
tunities for  gain  would,  in  any  case,  necessitate  a  market  rate ; 
that  an  interest  rate  being  already  established,  the  opening  up 
of  opportunities  for  investment  in  production  goods,  or  in 
any  direction  of  gain,  must  increase  the  advantages  going 
with  saving,  and  must  therefore  modify  the  interest  rate. 

It  is  also  clear  that  the  investment  demand  for  funds  is  the 
aggregate  of  all  the  different  dispositions  to  obtain  OAvnership 
or  control  of  either  durable  production  or  consumption  goods, 
or  to  enter  upon  gainful  enterprise  of  any  sort ;  that  gainful 
enterprise  takes  countless  lines  of  direction  —  some  of  them 
social  and  others  anti-social  —  into  anything  subserving  the 
ends  of  private  advantage  ;  and  that  the  point  of  adjustment 
between  demand  and  supply  is  the  interest  rate  for  the  partic- 
ular supply  of  funds. 

And  it  has  further  been  made  clear  that  the  interest  rates 
fixed  in  this  process  of  market  adjustment  can  find  no  ulti- 
mate basis  in  the  burdens  or  pains  or  merits  of  any  lender 
and  can  express  no  quantitative  sum  of  pain  or  loss  or  sacri- 
fice to  him,  but  can  indicate  only  that,  at  his  margin  between 
savfng  and  lending,  the  advantages  of  saving  are  equal  to  the 
disadvantages  of  lending ;  that  the  marginal  saving  of  differ- 
ent abstainers  can  indicate  no  equality  of  burdens  or  ab- 
stinences or  displacements  between  the  abstainers ;  that 
likewise  the  marginal  borrowings  of  different  borrowers  can 
express  no  equality  of  benefits  between  the  borrowers ;  and 
that  the  payment  of  interest  by  one  borrower  to  one  lender, 
or  by  the  marginal  borrower  to  the  marginal  lender,  does  not 
express  the  quantitative  equality  of  the  gain  or  benefit  or 
utility  to  the  borrower  with  the  labor  or  burden  or  pain  or  loss 


396  THE  ECONOMICS  OF  ENTERPRISE 

of  the  lender,  but  only  an  equality  of  ratios  for  each  of  the 
parties,  in  his  marginal  saving  or  lending  or  borrowing,  be- 
tween the  advantages  and  disadvantages  involved.  All  the 
processes  in  the  interest  problem  require  a  thorough  individ- 
ualizing ;  explanations  by  aggregates  or  averages  or  by  the 
social  organism  are  all  equally  inaccurate  and  inadequate,  are 
all  equally  misleading  in  their  conclusions,  and  are  occa- 
sionally most  vicious  in  their  applications. 

The  chapter  to  follow  will  examine  the  relations  of  risk 
to  cost  of  production,  to  interest,  and  to  profit.  It  will 
make  clear  that  risk  is  one  out  of  a  large  number  of  costs 
not  easily  reducible  to  any  of  the  traditional  cost  categories ; 
that  against  many  of  the  hazards  incurred  by  the  entrepreneur, 
insurance  may  be  secured  on  terms  of  outlays  which  are 
plainly  costs ;  but  that  many  of  the  hazards  are  inevitably 
carried  by  the  entrepreneur  himself,  e.g.,  hazards  of  bad 
markets,  of  cut-throat  competition,  of  restrictions  of  credit, 
or  of  entire  withdrawals  of  credit,  and  of  insolvency ;  that 
these  dangers  are  the  greater  as  the  resources  of  the  entre- 
preneur are  less ;  that  thus  the  smaller  competitor  has  in 
many  directions  the  higher  percentage  of  costs  —  paying 
higher  for  such  bank  and  other  credit  as  he  obtains,  and  being 
limited  at  the  same  time,  not  only  in  what  he  can  get,  but 
as  well  in  what  he  can  safely  employ ;  that  his  competitors 
of  larger  resources  or  of  better  alliances  in  credit  relations 
are  able  to  obtain  credit  on  cheaper  and  safer  terms,  and  even 
to  dictate  when,  if  at  all,  he  shall  have  it,  and  on  what  terms  ; 
that  in  this  fact  that  the  risk  costs  are  more  as  the  ability 
to  compete  is  less,  is  illustrated  the  Law  of  Advantage  and 
Size,  later  to  receive  full  examination ;  that  in  larger  part 
because  of  these  greater  risk  charges  and  burdens,  the  small 
business  tends  to  remain  small  or  to  be  absorbed  in  some 
larger  and  more  prosperous  business  unit. 

The  chapter  will  also  show  that  to  distinguish  accurately 
risk  charges  from  interest  is  difficult  if  not  impossible ;  that 
interest,  as  the  reward  of  the  lending  abstainer,  or  as  his 
indemnity  for  foregone  opportunity,  or  as  a  premium  of 
present  over  future  money,  can  leave  no  place  for  risk  charges 
in  the  rate ;  but  that  looked  at  from  the  point  of  view  of 
the  borrower,  the  entire  payment  appears  as  the  price  of 
the  advantage  in  prospect. 

In  other  cases,  risk  gains  are  difficult  to  distinguish  from 


THE  LOAN  RATE:    INTEREST       '  397 

profits.  If  the  hazard  is  one  attaching  to  the  invested 
capital,  the  return  for  the  hazard  is  obviously  rather  risk 
interest  than  risk  profit.  And  where  the  return  is  not  more 
than  the  cost  of  the  risk,  there  can  accurately  be  no  room  for 
any  profit  or  gain  of  any  sort.  Nor,  finally,  if  profit  be 
defined  —  as  will  on  the  whole  seem  best  —  as  the  remunera- 
tion of  personal  entrepreneur  activity  in  the  pursuit  of  gain, 
can  risk  returns  make  part  of  profit.  Only,  in  fact,  when  the 
pay  for  carrying  the  risk  outruns  the  cost  of  carrying  it,  as 
is  typically  the  case  in  insurance,  is  there  accurately  gain  of 
any  sort ;  and  even  then  it  is  not  clear  that  gain  from  carry- 
ing risk  should  require  a  separate  and  special  name. 


CHAPTER  XX 

RISK,    PROFIT,    AND    INTEREST 

Risk  may  be  a  cost.  —  It  is  a  commonplace  that  if  all 
merchants  could  sell  their  wares  always  at  cash,  the  prices 
of  the  goods  could  be  lower  to  the  buyers.  Only  such  cus- 
tomers as  paid  would  be  able  to  get  goods  at  all ;  there 
would  then  be  no  need  that  the  paying  customers  should 
make  good  the  defaults  of  the  nonpaying.  In  the  long 
run  it  is  the  customer  who  pays  who  foots  the  bill  for  the 
customer  who  does  not  pay.  The  poor  accounts  are  really 
a  part  of  the  merchant's  costs  of  doing  business  with  the 
customers  who  pay.  The  selling  price,  therefore,  includes  a 
loading  for  the  average  risk  that  the  bill  cannot  be  collected. 

It  is  clear,  then,  that  there  are  costs  in  business  other  than 
the  four  cost  categories  with  which  economic  analysis  is 
familiar  —  wages,  profits,  rents,  and  time  discounts.  In 
addition  there  are  taxes,  and  advertising,  and  royalty  out- 
lays, and  ordinary  insurance  premiums ;  and  there  are  also 
the  costs  of  those  risks  which  the  business  man  himself  must 
carry  —  not  to  speak  of  a  wide  variety  of  other  charges. 

Noninsurable  risks.  —  The  risks  against  which  the  busi- 
ness man  either  cannot  or  does  not  insure  are  many.  There 
may,  for  example,  because  of  his  dubious  credit,  be  higher 
rates  to  pay  upon  the  funds  that  he  borrows.  He  pays  the 
more  as  he  is  able  to  pay  the  less  :  "  From  him  that  hath  not 
shall  be  taken  even  that  he  hath."  It  is  in  this  respect  that 
it  is  especially  well  to  be  of  the  inner  circle  in  financial  in- 
stitutions, to  have  a  share  in  the  management,  or  at  any  rate 
to  stand  high  in  the  favor  of  the  men  who  do  the  managing. 
Otherwise  a  competitor  may  enjoy  the  large  loans  at  the 
favorable  rates,  or  may  have  the  advantage  of  special  facili- 
ties for  obtaining  loans  when  he  needs  them  most,  or  of  hav- 

398 


RISK,  PROFIT,  AND  INTEREST  399 

ing  them  extended  if  he  is  ill  prepared  to  meet  them.  Many 
projected  enterprises,,  railroads  and  others,  never  get  started 
because  the  credit  negotiations  are  blocked  by  opposing 
interests.  Or  the  favored  business  man  may  even  be  allowed 
to  dictate  the  rates  which  his  competitors  must  pay,  or,  not 
rarely,  to  decide  when,  if  at  all,  the  loans  shall  be  granted, 
or,  still  better,  to  determine  when  these  loans  shall  be  called. 
His  competitors  are  made  to  pay  well  for  what  they  get 
and,  even  on  these  terms,  may  regard  themselves  fortunate 
to  get  anything. 

Affiliations  and  costs.  —  These  risk-costs  of  the  business 
man,  in  view  of  his  facilities  for  meeting  and  disposing  of 
risks  —  the  significance,  that  is,  of  credit  and  of  credit 
affiliations  —  are  thoroughly  well  recognized  in  the  business 
world,  are  of  enormous  significance  for  business  success  and 
business  gain,  and  are  yet  strangely  neglected  in  economic 
literature.  It  is,  indeed,  commonly  asserted  that  any  busi- 
ness man,  able,  energetic,  and  trustworthy,  will  always  find 
at  his  disposal  whatever  "  capital  "  he  needs. 

Risk-costs  of  weak  competitors.  —  The  fact  that  the  small 
business  does  not  get  larger  is  so  much  a  commonplace  that 
the  implications  from  it  are  likely  not  to  be  recognized  or 
the  meaning  of  it  realized.  The  small  business,  whether 
shop  or  factory,  is  often  at  some  disadvantage  against  a 
larger  competitor  by  the  mere  fact  that  the  small  is  small  and 
the  large  is  large.  The  larger  concern  can  buy  more  cheaply, 
manufacture  more  economically,  sell  more  closely.  In  many 
enterprises  there  is  pronounced  advantage  going  with  the 
size  of  the  business  unit.  The  elimination  of  the  small  com- 
petitors and  the  progressive  increase  in  the  size  and  power 
of  the  larger  are  striking  facts  in  modern  business.  The 
larger  gets  still  larger  because  it  is  large  in  the  beginning : 
the  smaller  dwindles  because  it  was  originally  small. 

But  if  the  handicap  of  the  small  lies  in  the  sheer  fact  of  its 
smallness  —  precisely  as  the  curse  of  the  poor  has  been  said 
to  be  their  poverty  —  why  does  not  the  small  business 
forthwith  make  itself  bigger,  as,  we  are  informed,  it  easily 
could  ?  Why  is  it  that  so  many  men  and  firms  and  corpora- 
tions suffer  for  lack  of  capital,  that  the  undertakings  are 


400  THE  ECONOMICS  OF  ENTERPRISE 

unprosperous  or  poor  or  failing  by  the  mere  fact  that  they 
are  small?  Or,  take  it,  even,  that  a  business  is  prosperous 
despite  the  fact  that  it  is  small :  why  cannot  the  proprietor 
extend  it?  If  only  he  had  the  "  capital,"  he  could  easily 
double  his  operations,  and  possibly  also  at  a  higher  rate  of 
gain  upon  each  dollar  of  his  larger  volume  of  business.  There 
are  banks  enough,  and  lenders  enough :  why  need  he  lack 
for  funds? 

Differential  opportunity.  —  Precisely  here  come  in  the 
meaning  of  credit  to  the  business  man  and  the  importance 
to  him  of  the  amount  and  rate  and  time  and  temper  of  the 
loan.  In  this  aspect  especially,  is  it  important  to  have  favor- 
able affiliations  and  connections  and  communities  of  interest. 
To  belong  to  the  right  group  is  to  enjoy  great  differential 
advantages  and  to  possess  the  key  to  business  opportunity 
in  general.  There  is  far  more  in  credit  than  mere  good  repute 
for  wealth,  cautious  business  methods,  and  faithfulness  to 
obligations. 

Risk  limit  on  size.  —  Thus,  it  may  be  that  the  business 
man  in  question  may  not  be  able  to  command  the  resources 
by  which,  if  he  could  get  them,  his  gains  would  greatly  in- 
crease, and  for  which,  if  he  could  get  them,  he  might  afford 
to  pay  a  generous  interest  charge.  His  business  remains 
small  merely  because  it  is  small. 

Or  if  he  gets  the  funds,  he  may  be  obliged  to  pay  so  high 
a  rate  for  them,  or  so  to  hazard  his  control  of  the  enterprise, 
as  to  prohibit  any  move  toward  expansion.  This  is  a  class 
of  risks  which  the  entrepreneur  cannot  get  carried  for  him 
by  others  at  any  level  of  premium.  The  lender  takes  a  risk, 
it  is  true,  and  the  borrower  pays  him  for  it ;  but  the  borrow- 
er's risk  is  not  thereby  the  less,  but  the  greater.  And  the 
more  he  tries  to  extend  his  business  upon  a  given  basis  of 
capital  and  responsibility,  the  higher  he  will  commonly  have 
to  pay  for  the  funds  that  he  borrows.  On  these  terms  the 
advantages  which  go  with  size  may  be  speedily  exhausted. 

More  responsibility,  less  risk-cost.  —  The  total  of  the 
entrepreneur's  net  individual  wealth  is,  in  fact,  an  ultimate 
guarantee  fund,  a  sort  of  margin,  which,  as  finally  and  solely 
liable  for  the  losses  of  his  adventure,  not  only  affects  the 


RISK,   PROFIT,   AND  INTEREST  401 

rate  and  terms  on  which  he  can  get  funds,  but  also  limits  the 
amount  which  he  can  get. 

And  more  importantly  still,  his  reserve  of  net  investment 
limits  the  funds  which,  consistently  with  safety,  he  will  be 
willing  to  borrow.  To  extend  his  operations  may  indeed 
be  gainful,  if  all  goes  well.  But  he  must  beware  of  water 
beyond  his  depth :  he  must  avoid  so  much  sail  as  to  risk 
the  foundering  of  his  boat  under  any  sudden  puff  or  gust  or 
stress.  Or  —  changing  again  the  figure  —  he  must  keep 
his  lines  of  retreat  open.  If,  instead  of  things  going  well, 
as  he  believes  they  will,  they  go  ill,  as  he  knows  they  may, 
he  must  be  prepared  for  the  emergency.  Panics  may  come 
when,  even  though  a  favored  customer,  his  bank  cannot  pro- 
tect him.  Or  the  bank  itself  may  suspend  or  fail.  These 
are  dangers  which  in  accurate  business  computations  are 
costs ;  they  are  the  greater  as  the  ratio  of  operations  to 
ultimate  responsibility  becomes  higher.  When  costs  of  this 
sort  are  properly  allowed  for  —  when  the  business  man  ade- 
quately recognizes  as  costs  what  the  economist  rarely  recog- 
nizes as  costs  at  all  —  the  marginal  limit  of  production  is 
easily  reached.  To  carry  his  adventure  further  would  be 
to  assume  a  further  risk  of  loss  disproportionate  to  the  prom- 
ise of  larger  gain. 

Hazard,  cost,  and  profit.  —  The  principle  that  hazards  of  loss 
are  costs  has  many  illustrations.  The  unharvested  crops  form,  in 
the  long  run,  part  of  the  cost  of  the  harvested  crops ;  the  prospecting 
which  discovers  no  treasure  is  cost  for  the  treasure  that  is  discovered  ; 
the  blanks  in  the  lottery  must  indemnify  the  management  for  the 
prizes.  "  We  are  not  at  liberty,"  as  Marshall  remarks,  "  to  treat 
the  high  earnings  of  successful  men  as  rent  without  making  allowance 
for  the  low  earnings  of  those  who  fail."  ^ 

It  is  evident  that  when  the  compensation  for  risk  is  only  suflB- 
cient  to  cover  the  risk,  there  is  no  room  for  profit  in  the  accurate 
sense  of  the  term.  Profit  from  the  carrying  of  risk  can  emerge  only 
when  the  cost  of  the  carrying  is  less  than  the  remuneration. 
Accurately,  the  speculator's  so-called  profit  is  merely  the  cor- 
relative of  the  risk  assumed  rather  than  a  reward  for  skill  or  effort. 
One  who  tosses  a  penny  and  wins,  obtains  a  remuneration   for 

*  Alfred  Marshall,  Principles  of  Economics,  4th  ed.,  Book5,  Chap.  V. 
2d 


402  THE  ECONOMICS  OF  ENTERPRISE 

assuming  the  cquivalont  chance  of  loss.  The  buyer  of  town  lots  for 
a  rise  is  paying  the  sum  which  the  market  fixes  as  the  price  of  the 
property  in  view  of  the  chances  both  of  rise  and  of  fall.  There 
may,  of  course,  be  exceptional  skill  or  exceptional  information  on 
the  part  of  the  operator ;  so  far  as  this  is  true  there  is  room  for 
profit  as  the  reward  for  his  activity.  But,  in  the  main,  what  the 
operator  gets  more  than  a  mere  interest  return  is  received  as  gain 
upon  a  fortunate  wager.  Nor  does  the  term  risk  profit  cover  the 
logical  objection.  When  one  lends  "  capital,"  he  charges  something 
extra  for  risk  and  calls  it  interest,  or  risk  interest.  He  gets  more 
if  he  gets  anything,  because  of  the  danger  that  he  will  get  nothing. 
The  extra  charge  is  a  premium  upon  the  risk  accepted  —  an  incre- 
ment in  excess  of  true  interest  on  the  investment  —  because  of  the 
hazard  that  there  may  be  neither  interest  nor  principal.  But  the 
risk  charge  takes  the  form  of  a  rate  per  cent  computed  upon  the 
principal  sum,  and  is  paid  to  the  lender  together  with  the  use  charge. 
Thus  it  is  easy  to  confuse  it  with  the  use  charge  and  call  it  interest. 
If,  however,  a  surety  company  had  carried  the  risk  instead  of  the 
lender  —  had  guaranteed  him  from  loss  and  had  charged  him  a  rate 
per  cent  therefor  —  the  real  nature  of  the  transaction  would  have 
been  evident. 

It  is  clear,  then,  that,  viewed  as  the  reward  of  abstinence,  interest 
cannot  include  the  risk  share  in  the  amount  received.  Viewed  as 
any  sort  of  compensation  to  the  owner  for  an  opportunity  of  in- 
vestment foregone,  risk  must  be  excluded.  And  as  the  difference 
between  the  present  value  of  goods  and  their  future  value,  interest 
cannot  cover  risk ;  only  as  the  difference  between  a  certain  present 
value  and  a  contingent  future  value  could  the  risk  charge  be  included 
in  interest. 

Adopt,  however,  the  standpoint  not  of  the  lender,  but  of  the  bor- 
rower, and  the  question  takes  on  another  aspect ;  interest  becomes 
a  pajTncnt  for  the  use  of  wealth,  or,  more  accurately,  a  payment  for 
the  difference  in  desirability,  to  the  borrower  under  consideration, 
of  present  over  future  goods  —  or,  more  accurately  still,  of  present 
over  future  purchasing  power  as  reckoned  in  the  prevailing  standard. 
For  the  marginal  borrower  the  interest  is  the  approximate  equiva- 
lent of  this  difference. 

That  is  to  say,  the  risk  payment  is  received  by  the  lender  in  one 
character  and  is  paid  by  the  borrower  in  another.  It  advantages 
the  marginal  lender  nothing  or  nearly  nothing ;  the  risk  fact  may, 
in  truth,  diminish  his  net  or  pure  interest,  by  its  effect  to  retire 
some  part  of  the  total  demand ;  it  burdens  the  borrower  as  a  cost ; 
it  is  like  a  tax  imposed  on  the  loan  relation. 


RISK,  PROFIT,  AND  INTEREST  403 

Gains  from  assuming  risks.  — •  To  whom,  then,  goes  the  gain  to 
correspond  with  the  aggregate  of  loss  to  borrowers  and  lenders? 
It  does  not  necessarily  follow  that  the  entire  benefit  of  this  inter- 
mediate quantity  —  this  tax  —  accrues  to  the  defaulting  borrowers. 
There  is  room  for  lenders'  surpluses  in  the  relation,  —  that  is  to 
say,  there  may  be,  in  favor  of  the  nonmarginal  lender,  a  differential 
between  what  it  really  costs  to  carry  the  risk  and  the  compensation 
which  the  market  premium  upon  risk  allows.  And  this  differential 
is  the  only  case  of  true  risk  profit  in  the  interest  relation ;  subject 
to  this  modification,  the  premium  is  the  precise  equivalent  of  the 
accepted  danger  of  loss. 

Terms  appropriate  to  the  relations.  —  But  it  remains  to  decide 
what  name  shall  be  given  to  the  entrepreneur's  return  for  his  risks. 
It  is  often  regarded  as  a  portion  not  of  interest,  but  of  profit.  But 
as  it  is  evidently  not  remuneration  for  the  personal  factor  in  pro- 
duction or  in  business  activity  of  any  sort  —  not  pay,  that  is,  for 
labor  of  superintendence  or  for  any  other  form  of  effort,  but  only 
compensation  for  the  danger  incurred  of  failing  to  get  compensation 
—  there  is  force  in  the  view  that  the  special  category  of  risk  proUt 
should  be  recognized.  The  objection  to  tliis  is,  as  we  have  seen, 
that,  just  as  when  one  lends  his  capital  he  charges  something  extra 
for  risk,  and  calls  it  interest  or  risk  interest,  so  when  he  puts  his  own 
capital  at  risk  in  his  own  business,  he  should,  it  would  seem,  reckon 
his  risk  gain  as  compensation  for  the  hazardous  capital  use  —  an- 
other form  of  risk  interest.  The  losses  of  an  enterprise  must  ordi- 
narily be  paid  out  of  the  operator's  wealth.  Profit  makers  pay 
losses,  when  losses  come,  in  the  capacity  of  wealth  owners  and  not 
of  mere  operators. 

But  it  has  still  to  be  recognized  that  the  thing  at  hazard  is  not 
necessarily  and  solely  the  capital  invested.  The  operator  may, 
indeed,  be  investing  nothing  but  his  time  and  effort ;  or  his  hazard 
may  be  such  as  to  extend  no  further  than  the  value  of  the  time  and 
effort  devoted  by  him  to  the  enterprise. 

There  is,  then,  room  for  a  concept  of  risk  wage ;  and  for  this 
there  could  be  no  valid  objection  to  the  term  risk  profit,  were  the 
term  profit  not  already  overweighed  in  point  of  duties  and  over- 
clouded with  accumulated  ambiguities. 

Risk  interest,  then,  should  be  extended  to  cover  not  merely  the 
hazard  compensation  of  actual  lenders,  but  also  compensation  for 
the  hazard  of  him  who  adventures  his  own  resources  under  his 
own  management.  1 

1  Cf.  Veblen,  Theory  of  Business  Enterprise,  pp.  120-130,  as 
to  the  difficulty  of  finding  a  time  unit  for  the  hazards  and  jjains 
of  high  fii;  mce. 


40-i  THE  ECONOMICS  OF  ENTERPRISE 

Social  welfare,  proceeds,  and  profits.  —  The  question  remains 
whether  the  term  j)r()tit  shall  serve  (1)  merely  for  exceptional,  un- 
classified, irregular  gains  —  CO njimctui'c  profits  as  they  have  sometimes 
been  calleil  —  or  whether,  on  the  contrary,  the  term  should  stand 
(2)  for  the  broader  notion  of  compensation  for  the  independently 
working  human  factor  in  production,  or  (3)  for  the  still  broader  notion 
of  compensation  for  the  independent  human  factor  in  the  quest 
for  gain. 

For  it  must  be  noted  that  here  as  elsewhere  there  is  danger  of 
confusing  the  socially  productive  aspects  of  business  with  the  com- 
petitive and  gain-making  aspects.  Number  (2)  would  conceive 
profits  as  compensation  for  independent  productive  activity,  and 
would  thus  make  no  place  for  a  large  part  of  what  fall  under  the 
general  head  of  conjuncture  gains,  but  would  stand,  rather,  as  an 
opposed  and  alternative  notion.  Number  (3),  the  competitive 
view,  would  harmonize  (1)  and  (2)  by  including  them. 

It  has  been  the  writer's  preference  to  use  the  term  profit  in  this 
third  sense  as  denoting,  that  is,  the  compensation  falling  to  inde- 
pendent business  activity  after  such  apportionment  as  is  possible 
has  been  made  for  rent,  interest,  wages,  and  other  outlays.  In  this 
sense,  profits  stands  as  merely  one  form  of  the  remuneration  of  labor 
and  is  thereby  a  subhead  under  the  broader  interpretation  of  the 
term  wages. ^ 

Profit,  as  a  form  of  wages,  then,  points  to  gai7i  without  the  in- 
tervention of  an  employer ;  it  is,  then,  remuneration  to  the  entre- 
preneur for  entrepreneur  activity  as  such.  This  profit  goes,  no 
doubt,  to  him  who  takes  the  risk,  but  does  not,  therefore,  go  as 
compensation  for  the  risk  or  in  proportion  to  it.  It  is,  indeed,  in 
the  very  nature  of  entrepreneur  labor  that  it  is  the  labor  of  the  risk 
taker. 

Speculation,  gambling,  and  underwriting.  —  There  are, 
however,  gains  which  are  made  through  the  business  of  carry- 
ing risks.  This  is  the  field  of  underwriting,  of  which  fire, 
life,  and  accident  insurance  are  the  most  familiar  illus- 
trations. The  underwriter's  gains  accrue  through  the  mar- 
gin of  difference  between  the  cost  of  carrying  risk  and  the 
compensation  which  is  received  through  the  market  pre- 

1  And  wages,  it  should  be  remembered,  are  not  derivative  solely 
from  technological  or  other  productive  activity.  I  may  pay  my 
wage  earner  to  destroy  your  property  or  to  besmirch  your  reputa- 
tion. 


RISK,  PROFIT,  AND  INTEREST  405 

miura  upon  risk.  From  the  point  of  view  of  the  under- 
writers, indeed,  the  risks  mostly  merge  into  the  certainty 
of  the  general  average.  The  wider  the  field,  the  smaller  the 
risk.  Toss  a  penny  once  and  the  outcome  is  entirely  one 
of  chance  —  even  chances  of  heads  and  tails :  but  in  an  in- 
finite number  of  cases  the  chance  disappears  in  the  certainty 
of  an  even  number  of  heads  and  tails.  Insurance  is,  then, 
theoretically  a  traffic  in  risk  without  risk  to  the  traffickers. 

From  the  point  of  view  of  the  insured,  also,  insurance  differs 
from  gambling  by  the  fact  that  insurance  is  a  contract  under  the 
terms  of  which  no  gain,  but  only  indemnity  against  loss,  is  possible. 
Gambling  may  be  a  fair  contract,  but  must  be  —  if  a  fair  contract 
—  a  foolish  contract.  The  law  of  falling  utility  applies  for  each  in- 
dividual to  his  income  or  to  his  money,  for  the  very  reason  that  it 
applies  to  the  various  different  things  for  which  income  or  money 
may  be  spent.  To  add  $10  to  the  $100  that  one  has,  is  a  gain 
smaller  than  would  be  the  loss  suffered  by  losing  $10  out  of  the  same 
$100.  The  gain  is  one  that  attends  the  11th  ten  dollars  ;  the  loss 
is  the  loss  of  the  10th  ten  dollars.  But  the  insurance  contract 
precisely  reverses  the  gambling  principle  and  deduces  advantage 
from  this  law  of  falling  utility.  If  you  were  assured  of  three  meals 
a  day  for  the  next  month,  but  faced  one  chance  out  of  a  hundred 
of  having  nothing  to  eat  the  following  month,  you  could  well  give 
up  one  of  the  three  meals  for  the  first  month  in  order  to  be  guar- 
anteed against  starvation  for  the  second.  This  would  be  to  pay 
33  times  the  mathematical  value  of  the  risk.  So,  with  a  $10  pre- 
mium upon  a  $1000  fire  policy,  the  policyholder  gives  up  his  mar- 
ginal and  relatively  unimportant  $10  of  income  in  order  to  be 
guaranteed  against  the  possibility  of  the  loss  of  units  of  much 
higher  rank.  The  aggregate  significance  of  the  entire  $1000  is 
indefinitely  more  than  $100,  times  the  importance  of  the  marginal 
$10.  If,  therefore,  there  be  one  chance  in  200  of  losing  the  whole 
$1000,  the  policyholder  may  well  afford  to  pay  Ywn  o^  $1000  to  be 
protected  against  this  chance. 

The  gains  of  underwriting  are,  then,  due  to  the  difference 
between  what  it  costs  to  carry  a  risk  and  what  it  is  worth  to 
get  it  carried.  But  it  does  not  follow  that  the  gains  from 
underwriting  are  properly  to  be  called  risk  profits.  As  well 
call  the  gains  from  calico  manufacturing  calico  profits,  or 
from  fishing,  fish  profits. 


406  THE  ECONOMICS  OF  ENTERPRISE 

In  point  of  fact,  risks  divide  into  two  classes  :  (1)  where  the 
danger  of  loss  has  no  correlative  aspect  of  possible  gain,  and 
where,  therefore,  the  problems  are  solely  (a)  as  to  whether 
the  hazard  is  one  that  can  be  shifted,  and  (6),  if  so,  who  shall 
carry  it  —  cases  which  easily  lend  themselves  to  the  business 
of  making  gain  off  the  carrying  of  others'  risks  —  and  (2) 
where  the  possible  profit  and  the  possible  loss  are  somehow 
in  the  market  equated  one  against  the  other  :  these  are  cases 
which  lend  themselves  readily  to  speculation  and  to  gambling. 

The  causal  relations  of  risk  to  business  gains  having  now 
been  discussed,  the  next  chapter  will  in  large  part  concern 
itself  \\dth  gathering  together  the  scattered  threads  of  the 
interest  argument.  Nothing  new  will  be  attempted  further 
than  to  make  clear  that  there  can  be  no  one  world,  or  even 
market,  interest  rate,  —  a  fundamental  rate  of  net  or  pure 
interest  variously  modified  by  additional  charges  for  various 
times,  places,  and  conditions.  The  fact  will,  on  the  contrarj^, 
be  sho'^Ti  to  be  that  there  is  not  even  one  rate  for  any  one 
town  for  any  one  day.  It  was,  indeed,  as  leading  up  to 
this  point  in  the  analysis,  that  the  discussion  of  risk  was 
undertaken  in  this  chapter. 


CHAPTER  XXI 

CAPITALIZATION    AND    DISCOUNT   RATES 

Exchange  media.  —  The  current  circulating  medium  includes 
—  as  we  have  seen  and  shall  later  more  fully  see  —  not  merely  all 
forms  of  money,  but  those  credit  substitutes  for  money  in  actual 
employment  as  media  of  exchange.  Money  and  circulating  credit 
combine  to  form  the  aggregate  of  currency  —  the  aggregate  cir- 
culating medium.  The  two  together  make  up  the  volume  of  sus- 
pended purchasing  power  in  society.  Any  commodity  sold  by  its 
owner  places  him  in  command  of  this  currency,  this  suspended 
purchasing  power.  This  suspended  purchasing  power  is,  in  turn, 
available  for  acquiring  immediate  or  durable  consumption  goods, 
for  investment  in  gain-promising  directions — productive  goods  or 
what  not,  —  or  for  lending  to  borrowers.  The  loan  fund  of  any  time 
is  that  part  of  the  aggregate  fund  of  suspended  purchasing  power 
which  the  possessors  are  disposed  to  lend.  This  loan  fund  we 
have  seen  to  be  the  subject  of  capital  borrowing  for  interest. 

It  is,  then,  evident  that  the  activities  of  deposit  banking  insti- 
tutions are  closely  connected  with  the  volume  of  loan  funds  ex- 
isting at  any  particular  time.  Any  further  examination  of  the  bank- 
ing function  is  not  possible  here.  But  so  much  as  this  is  evident : 
The  discount  of  a  customer's  note  is  an  operation  by  which  the  bank 
furnishes  the  customer  with  a  demand  upon  itself  available  as  im- 
mediate purchasing  power.  He  uses  this  purchasing  power  by 
assigning  to  some  one  else  his  right  of  immediate  demand  against  the 
bank.  The  result,  then,  of  discount  banking  is  to  put  into  circula- 
tion a  great  total  of  currency.  The  deposit  credits  thus  created  are 
loan  funds  in  the  hands  of  the  holders  to  the  extent  that  this  use 
of  them  is  chosen. 

Whether  or  not  it  be  decided  that  the  lending  function  of  the 
banks  is  itself  an  influence  upon  the  interest  rate,  or  rates,  of  the ' 
market,  and  whether,  if  so,  the  influence  in  this  direction  is  effective 
not  merely  temporarily,  but  permanently,  or  whether,  on  the  other 
hand,  the  only  long-time  effect  is  upon  the  general  price  situation 
need  call  for  no  further  discussion.     This  much  is  at  all  events  clear : 

407 


408  THE  ECONOMICS  OF  ENTERPRISE 

deposit,  currency  constitutes  a  largo  part  of  the  existing  loan  fund 
of  any  particular  time. 

Hoarded  Funds  are  Capital.  —  Whatever  currency  an  individual 
receives,  either  as  current  income  or  as  the  sale  price  of  existing 
possessions,  he  may  dispose  of  in  various  ways.  So  far  as  he  directs 
his  funds  to  provision  for  the  future,  he  may  accomplish  his  end  by 
merely  hoarding  the  money,  or  he  may  invest  it  in  long-time  con- 
sumption goods,  or  in  production  goods,  or  he  may  lend.  In  any 
case,  his  savings  are  part  of  his  private  individual  capital,  no  matter 
what  chsposition  the  borrower  may  make  of  such  of  these  funds  as 
he  borrows. 

Private  capital  and  social  wealth.  —  But  it  has  already  been 
made  clear  that  there  is  no  necessity  that  the  increase  of  the  private 
capital  of  the  lender  involve  an  attendant  increase  of  social  capital. 
The  loan  may  have  been  used  by  the  borrower  for  consumption  pur- 
poses, spendthrift  or  other.  Or  the  borrowing  may  have  been  by 
the  State  for  the  financing  of  jingo  wars  or  of  administrative  deficits. 
In  short,  there  is  no  necessary  equivalence  between  the  totals  of 
social  capital  and  of  private  capital.  It  is  true  that  in  some  cases 
the  capital  credited  to  one  individual  is  a  debit  elsewhere.  But  it 
has  been  pointed  out  that  this  is  not  necessarily  the  case  —  that 
government  debts  are  commonly  demands  against  the  earning  power 
of  future  generations.  Likewise,  the  capitalized  value  of  a  franchise 
or  of  a  monopoly  or  of  a  patent  —  another  sort  of  a  monopoly  — 
appears  nowhere  as  a  debit  against  individual  wealth. 

The  ambiguities  in  the  term  capital  are  especially  dangerous  in 
this  connection.  Savings  are  private  capital ;  but  whether  they 
ever  come  to  express  themselves  as  an  addition  to  the  total  social 
capital  depends  upon  how  the  savings  are  used.  The  saver  com- 
monly lends  his  savings.  He  is  not  a  capitalizer  from  the  social 
point  of  view.  And  the  savings  which  he  lends,  even  though  not 
spent  by  the  borrower  for  consumption  purposes,  may  be  used  by 
the  borrower  in  the  creation  of  that  which,  though  capital  for  his 
own  purposes,  is  not  capital  in  any  social  accountancy  —  e.g.,  in 
the  creation  of  a  monopoly,  or  in  the  advertising  expenses  of  a 
publicity  campaign. 

Saving  and  growth  of  social  wealth.  —  The  truth  is,  then,  that 
saving  may  be  a  condition  precedent  to  the  increase  of  either  private 
or  social  capital,  but  that  social  saving  involves  as  a  further  step 
the  direction  of  the  savings  to  the  creation  of  social  capital.  Savings 
in  the  form  of  mere  purchasing  power  are  mere  rights  of  control 
over  wealth  or  labor.  Whether  social  capital  shall  emerge  must  de- 
pend upon  the  direction  of  the  control.     The  decision  commonly 


CAPITALIZATION  AND  DISCOUNT  RATES      409 

rests  with  the  borrower.  Banks  create  —  at  least  for  temporary 
purposes  —  these  rights  of  direction.  Their  chief  function  is  in 
the  redistribution  of  purchasing  power.  Tliis  redistribution  is 
effected  through  supplying  to  the  borrower  a  credit  which,  entering 
into  general  circulation,  is  an  item  of  currency  expansion. 

The  amount  of  loan  fund  in  any  society  or  in  any  market  is,  there- 
fore, more  a  question  of  the  organization  of  the  credit  situation  and 
of  the  distribution  of  the  individual  wealth  in  society  than  of  the 
aggregate  social  wealth.  The  great  centers  of  loan  capital  are  the 
banking  centers. 

Not  one  but  many  interest  rates.  —  We  have  also  seen  that  over 
against  the  aggregate  supply  of  loan  funds  are  the  various  demands 
for  loans,  for  all  sorts  of  puiposes,  with  all  degrees  of  hazard  to  both 
lender  and  borrower,  and  for  various  periods  of  time.  It  is,  then, 
inevitable  that  there  should  be  many  differences  in  interest  rates, 
not  merely  at  different  times  and  in  different  districts  and  countries, 
but  in  each  different  district  and  center,  and  for  different  classes  of 
borrowers,  and  for  different  borrowers  in  each  class.  Some  money 
lenders  consent  to  lend  part  or  all  of  their  funds  for  short  terms  only. 
Some  of  this  short-term  lending  is  upon  demand  —  call  loans,  as 
they  are  technically  named.  In  this  last  case  the  rate  is  commonly 
very  low.  Loans,  also,  for  long-time  investment  are  likely  to 
command  low  rates,  though  not  so  low  as  call  loans.  Excepting 
on  call  loans,  bank  rates  of  interest  rule  appreciably  higher  than 
other  rates.  One  reason  for  the  higher  bank  rate  is  in  the  conven- 
ience to  the  borrower ;  another  reason  is  in  the  administrative  and 
clerical  expenses  of  the  banking  business.  This  fact  of  an  expense 
loading  in  the  bank  rate  is  probably  the  main  explanation  for  the 
higher  charges  in  rural  communities  where  banking  operations  are 
of  relatively  small  magnitude. 

Rates  and  capitalization.  —  Evidently,  then,  there  is  no 
one  market  rate  of  interest,  even  in  any  particular  locality  — 
still  less  for  different  localities.  There  can,  then,  be  no  one 
market  rate  underlying  different  individual  bids  in  the  capi- 
talization process  or  employed  as  the  basis  of  them.  It  has, 
indeed,  been  made  clear  that  each  individual  has  his  indi- 
vidual and  peculiar  process  of  arriving  at  his  possible  bid 
for  any  desirable  good,  and  that  any  discount  rate  to  be 
ascribed  to  him  must  resolve  itself  commonly,  though  not 
of  necessity,  into  a  mere  general  comparison  of  the  desir- 
ability of  the  proposed  investment  as  against  the  most  de- 


410  THE  ECONOMICS  OF  ■  ENTERPRISE 

sirable  alternative  method  of  using  the  purchasing  power  at 
his  disposal. 

The  relation,  then,  of  the  rate  at  which,  if  one  borrows,  he 
must  borrow,  and  of  the  rate  at  which,  if  one  lends,  he  must 
lend,  to  his  individual  attitude  toward  any  proposed  invest- 
ment, is  obvious.  Clearly  he  does  not  accept  any  one  of  all 
the  different  market  rates  as  his  basal  rate  in  the  discount 
process  leading  to  his  bid.  Doubtless,  however,  whether 
as  the  cost  of  his  borrowing,  or  as  opportunity  for  his  lend- 
ing, these  rates  have  the  closest  possible  relation  to  the  fixa- 
tion of  his  bid. 

The  circuity  in  the  capitalization  doctrine.  —  And  just 
here,  also,  is  the  exit  from  the  logical  circuity  which  has 
long  perplexed  the  analysis  of  capitalization.  The  rent 
problem  is  easy  enough  of  solution,  as  the  mere  market 
value  of  the  use  of  durable  wealth.  But  the  rent  problem 
and  the  interest  problem  are  not  one  and  the  same  problem. 
There  is  no  telling  what  interest  a  rent-bearing  property 
earns  until  the  value  of  the  property  is  fixed.  Rent  is  in- 
terest when,  and  only  when,  it  is  expressed  as  a  percentage 
of  the  price  of  the  property.  But  how  arrive  at  this 
price  otherwise  than  by  an  appeal  to  the  very  interest  rate 
which  only  a  moment  since  purported  to  be  deduced  from 
the  ratio  between  the  total  value  and  the  value  of  the  time 
use? 

Different  men,  different  rents,  different  discount  rates.  — 
The  truth  is,  however,  that  there  is  no  such  interest  rate. 
There  is  only  the  earning  power  of  different  investments, 
all  of  which,  under  the  competitive  bidding  of  investors,  come 
to  offer  in  any  district  not  widely  different  rates  of  return 
for  similar  grades  of  risk  and  for  similar  periods  of  invest- 
ment. But  note  that  the  field  of  possible  investment  is  not 
confined  to  the  purchase  of  durable  goods  —  rent-bearing 
properties.  There  are  in  addition  all  sorts  of  pecuniary  activ- 
ities, speculation,  merchandising,  advertising,  promoting, 
and  the  various  professions  —  all  of  them  calling  for  funds. 
So  far  as  any  interest  rates  are  relevant  to  the  capitaliza- 
tion process,  they  are  the  rates  which  together  equate 
the  whole  volume  of  investment  opportunity  to  the  aggre- 


CAPITALIZATION  AND  DISCOUNT  RATES      411 

gate  supply  of  loanable  funds.  Interpreting  abstinence  to 
mean  no  more  than  the  disposition  not  immediately  to  con- 
sume, interest  rates  are  the  points  of  adjustment  between 
the  supplies  of  funds  and  the  different  borrowing  demands. 
The  bid  of  any  individual  for  any  item  of  durable  property 
is  concerned  with  interest  rates  only  as  the  cost  of  the  fund 
which  he  invests  or  as  alternative  opportunities  of  gain  in 
the  investment  of  his  funds.  The  interest  rates  derivative 
from  the  total  situation  come,  then,  to  bear,  through  com- 
petitive bidding,  upon  the  market  price  of  each  particular 
item  of  property  in  such  fashion  as  to  equalize  the  objective 
and  impersonal  advantages  attaching  to  one  as  against 
another  property. 

The  examination  of  interest  and  of  the  connected  problems 
having  been  completed,  the  discussions  of  the  next  chapter 
will  return  to  a  consideration  of  some  of  the  more  general 
problems  of  theory,  and  especially  of  the  doctrines  holding 
that  there  are  only  three  classes  of  productive  factors,  land, 
labor,  and  capital ;  that  there  are  only  four  classes  of  cost 
of  production,  rent,  interest,  wages,  and  profits ;  that,  as 
costs  of  production  are  limited  to  four,  so  distributive  shares 
are  limited  to  the  same  four ;  that  these  four  distributive 
shares  are  assigned  exclusively  to  the  three  productive  factors, 
land,  labor,  and  capital ;  and  that  the  distributive  process 
involved  in  entrepreneur  production  accounts  for  the  dis- 
tribution of  the  aggregate  income  of  society. 

It  will  be  shown  that,  on  the  contrary,  the  costs  of  pro- 
duction in  actual  business  are  legion ;  that  many  of  them 
are  not  rationally  to  be  classified  under  any  one  of  the  four 
heads  of  wages,  interest,  rent,  and  profits ;  that  many  of 
these  costs  are  expended  in  directions  not  rationally  to  be 
classified  under  any  of  the  three  heads  of  land,  labor,  and 
capital ;  that  many  of  the  costs  are  expended  for  things 
which  are  not  factors  of  production  at  all  in  any  mechanical 
or  industrial  or  technological  sense,  and  which  are  actually 
not  classified  as  any  one  of  these  in  traditional  economic 
discussion  ;  that  many  of  the  costs  are  expended  in  directions 
actually  classified  as  technological  when  they  really  are  not 
so  ;  and,  finally,  that  the  factors  which  are  accurately  techno- 
logical are  not  susceptible  of  classification  into  the  categories 
of  land,  labor,  and  capital,  or  into  any  other  definite  cats- 


412  THE  ECONOMICS  OF   ENTERPRISE 

gorios,  since  in  degree  and  in  kind,  the  varieties  are  beyond 
enumeration  and  are  in  constiint  change. 

The  argument  of  the  chapter  will  therefore  strongly 
reenforce  the  conclusions  of  earlier  chapters  condemning  all 
attempts  to  distinguish  land  from  other  instrumental  goods 
in  relation  to  cost  or  price  or  interest  or  capital. 


CHAPTER  XXII 

CLASSIFICATION    OF   THE    FACTORS    OF    PRODUCTION 

The  scope  of  cost  outlay.  —  We  have  seen  that  the  entrepre- 
neur, in  producing  goods  for  gain,  apportions  his  outlays  into  a 
variety  of  investments  —  labor,  land,  machines,  tools,  raw  materials, 
seed,  light,  heat,  power,  patents,  royalties,  taxes,  insurance,  advertis- 
ing, transportation  —  and  so  on  without  limit ;  that  all  of  these 
different  outlays  are  equally  costs  in  the  sense  of  price  expenses 
submitted  to  in  the  prospect  of  price  returns  to  come ;  but  that 
these  different  outlays  in  price  do  not  complete  the  catalogue  of 
costs ;  there  must  be  included  a  price  charge  for  the  entrepreneur's 
own  labor  —  his  necessary  profits,  in  view  of  his  alternative  open- 
ings and  in  view  also  of  any  exceptional  burden,  or  stress,  or  disre- 
pute, or  risk  of  bodily  harm,  involved  in  the  undertaking ;  that, 
together  with  these  risks  and  resistances,  there  must  be  included 
charges  for  those  hazards  of  pecuniary  loss  which  he  is  either  unable 
or  unwilling  to  get  carried  for  him  by  others ;  and  that,  in  addition, 
he  must  compute  not  only  his  interest  outlays  upon  borrowed  funds, 
but  also  a  time  charge  upon  the  aggregate  investment  of  his  own 
resources  in  land,  equipment  goods,  finished  products  in  stock,  and 
in  credits  and  general  operating  funds. 

The  objects  of  outlay  :  Bases  of  distribution.  —  What, 
then,  can  the  economists  mean  in  confining  costs  of  pro- 
duction to  wages,  profits,  rent,  and  interest,  and  in  reducing 
all  the  different  factors  of  production  to  the  corresponding 
categories  of  labor,  entrepreneurship,  land,  and  capital? 

But  this  fourfold  classification  of  costs  presents,  at  its 
next  step,  still  greater  perplexities :  Recalling  that  costs  to 
the  entrepreneur  —  some  of  his  costs,  at  any  rate,  like  rent, 
wages,  and  interest  —  are  distributive  shares  to  the  recipi- 
ents, we  arrive  at  this  astounding  doctrinal  climax :  that 
the  entrepreneur  process  decides  and  apportions  the  dis- 
tribution of  the  entire  income  of  society,  and  that  the  aggre- 
gate social  product  is  accounted  for  and  distributed  under 

413 


414  THE  ECONOMICS  OF  ENTERPRISE 

the  four  entrepreneur  categories  of  wages,  profits,  rent,  and 
interest. 

The  traditional  view  examined.  —  Not  at  all  denying  that 
wages,  rents,  time  discounts,  and  necessary  profits  are  cost 
items  —  when  they  are  incurred  by  the  entrepreneur  in  the 
productive  process  —  or  that  as  costs  to  him  they  are  dis- 
tributive shares  out  of  the  value  of  the  products  sold,  it  is 
still  to  be  remarked  that  there  are  capital  funds  as  well  as 
capital  tools,  monopoly  capital  as  well  as  machine  capital, 
franchise  rents  as  well  as  land  rents,  publicity  investments 
as  well  as  investments  in  salesmen's  salaries.  Can  all 
these  different  outlays  be  distributed  within  the  rent, 
interest,  wage,  and  profit  classifications,  and  all  the  bases  of 
these  outlays  be  distributed  as  land  or  labor  or  capital? 
And  even  admitting  this  to  be  possible,  are  all  distributive 
shares  in  society  to  be  so  accounted  for?  What,  for  ex- 
ample, about  interest  upon  consumption  loans,  or  about 
gains  from  tax  farming  contracts,  or  from  patents  or  fran- 
chises? True,  all  these  investments  are  capital,  but  they 
are  evidently  not  capital  in  the  sense  of  factors  of  production 
serving  as  auxiliaries  in  the  process  of  making  things.  And 
how  about  countermoney  and  balances  at  the  bank?  True, 
these  also  help ;  these  also  are  capital ;  but  not  in  the  tech- 
nological or  mechanical  or  industrial  sense,  according  to 
which  machinery  is  capital,  and  according  to  which  land  and 
labor  are  factors  of  production  differing  each  from  the  other. 
And  in  what  classification  —  land,  labor,  or  capital  —  shall 
the  money  and  the  bank  balances  and  the  patents  and  the 
franchises  be  distributed  ?  Surely  each  and  all  cost  money  ; 
but  so  does  land.  Surely  they  require  capital  to  buy  them 
or  to  hire  them ;  but  so  does  land.  And  of  what  sort,  after 
all,  is  this  capital  that  is  invested  in  them  ?  Is  it  machinery 
as  distinguished  from  land  ?  or  capital  in  any  sense  to  identify 
it  with  machines  and  to  distinguish  it  from  labor  or  land? 
It  is,  in  fact,  capital,  but  precisely  that  form  of  capital  which 
is  invested  indifferently  in  lands  and  machines  and  rents 
and  interest  and  wages.  It  is  capital  in  that  private  and 
acquisitive  sense  that  has  nothing  to  do  with  capital  as  a 
factor  of  production,  and  is,  indeed,  irrelevant  to  all  tech- 


FACTORS  OF  PRODUCTION  415 

nological  classifications.  Upon  the  basis  of  these  nontech- 
nological  forms  of  capital,  as  well  as  upon  the  technological 
forms,  the  distributive  process  partly  takes  place. 

By  what  strange  process  of  reasoning,  then,  were  this  four- 
fold classification  of  factors  and  these  derivative  doctrines 
of  cost  and  distribution  arrived  at  ? 

The  traditional  view  collective  and  genetic.  —  But  the 
case  will  not  look  so  strange  if  regarded  in  the  large  and  from 
the  social  point  of  view.  The  wealth  of  any  isolated  indi- 
vidual, his  total  of  belongings,  must  be  made  up  of  the  orig- 
inal environment  plus  what  he  has  added  to  it.  The  pro- 
ductive power  which  he  wields  rests  in  part  upon  his  own 
personal  efficiency,  the  organism  side ;  in  part  upon  the  pro- 
ductive efficiency  of  his  possessions,  the  environment  side. 
In  the  nature  of  the  case  he  can  have  no  other  sources  of 
product.  And  precisely  so  with  society  taken  in  the  aggre- 
gate. All  production  must  be  due  to  human  energies  in 
conjunction  with  human  possessions.  Therefore,  all  prod- 
uct must  be  (1)  returns  upon  labor,  that  is,  wages  or  profits, 
or  (2)  returns  either  on  (a)  natural  environment,  that  is, 
land  rents,  or  (b)  artificial  environment,  other  rents. 

Could  anything  be  simpler?  or  more  logical?  or  more 
philosophical  in  its  grasp  of  fundamentals?  But,  unfor- 
tunately for  theorists  and  theories,  we  are  in  a  competitive 
society,  into  the  language  of  which  the  collectivist  doctrine 
need  not  translate,  and  upon  the  phenomena  of  which  the 
collectivist  analysis  may  throw  scant  light.  We  are  in  a 
society  in  which  the  property  bases  of  income  are  something 
more  than  lands  and  machines,  in  which  the  processes  of 
production  are  something  more  than  mere  technology, 
in  which  the  products  are  more  than  material  things.  We  are 
in  a  regime  of  price  for  individual  gain,  where  patents  and 
franchises  and  monopolies  are  capital ;  where  burglars' 
jimmies  are  production  goods ;  where  advertising  is  one  of 
the  costs  of  product,  insurance  is  a  necessary  business,  gam- 
bling a  trade,  speculation  a  career,  circumventing  the  law  a 
profession ;  where  products  are  merely  salable  things,  — 
meat,  bread,  and  cloth,  truly,  but  likewise  stocks,  offices, 
talk,  music,  moving  pictures,  acrobatic  antics,  spiritualistic 


41©  THE  ECONOMICS  OF  ENTERPRISE 

revelations,  quack  diagnoses,  phrenological  charts,  and 
humbugs  in  general ;  where  restriction  of  production  is 
often  more  gainful  than  technological  production ;  where 
wages  may  be  had  for  demoralizing  the  public  taste,  or  for 
slandering  the  opposition  candidate,  or  for  corrupting  the 
judge  or  jury  or  legislature,  or  for  poisoning  a  neighbor's 
well  or  cow,  or  for  setting  fire  to  a  competitor's  refinery. 
In  short,  we  are  in  a  competitive  society,  most  of  the  serious 
problems  of  which  sum  up  into  one  great  and  inclusive 
problem,  how  to  limit  the  receipt  of  private  income  to  the 
rendering  of  social  service. 

Traditional  view  technological,  but  untrue  to  technology. 
—  None  the  less,  there  are  many  undertakings  in  which  the 
entrepreneur  is  engaged  in  the  technological  process  of  plac- 
ing material  things  upon  the  market.  He  is  employing 
laborers  and  different  sorts  of  instrumental  goods,  e.g.,  land, 
machines,  fuel,  raw  materials.  Here  are  various  factors 
of  production  engaged  in  a  technological  process,  cooperat- 
ing under  the  entrepreneur's  direction  in  the  putting  forth 
of  a  joint  product,  and  sharing  somehow  in  the  returns  from 
that  product.  Perhaps,  also,  the  entrepreneur,  from  whom 
as  an  employer  the  different  factors  receive  their  distributive 
shares  out  of  the  product  —  shares  which  to  him  are  costs  — 
is  himself  taking  part  as  a  laborer  in  the  industrial  or  me- 
chanical process. 

Here,  surely,  there  are,  in  the  technological  sense,  factors 
of  production  which  are  recipients  of  distributive  shares 
by  title  of  contribution  to  a  joint  salable  product.  But 
will  these  factors  classify  as  labor,  land,  and  capital?  and 
will  the  remuneration  distribute  into  the  corresponding  cat- 
egories of  wages,  profit,  rent,  and  interest  ?  Are  there  not 
other  factors  in  the  process?  and  are  there  not  other  dis- 
tributive shares  than  the  traditional  four  ?  Even  in  a  purely 
technological  enterprise,  is  it  possible  to  distribute  the  fac- 
tors into  this  three-  or  four-fold  classification,  with  their 
respective  remunerations  falling  into  the  corresponding 
categories?  How  many  factors  of  production  are  there? 
and  what  are  the  principles  of  likeness  and  of  difference? 


FACTORS  OF  PRODUCTION  417 

These  questions  were  in  considerable  part  answered  in 
Chapter  XI,  where  the  distinction  between  land  and  capital 
was  considered.  It  was  there  shown  (1)  that  no  one  of  the 
distinctions  commonly  urged  —  and  commonly  applied  all 
together  —  is  logically  tenable  and  practicably  applicable, 
and  (2)  that,  in  a  competitive  entrepreneur  economy,  no 
one  of  these  distinctions  would  matter,  even  were  it  tenable. 
At  the  most,  land  would  rank  as  one  among  many  different 
forms  of  capital. 

Many  kinds  and  degrees.  —  But  it  still  remains  true 
that,  from  the  tec^inological  point  of  view,  there  are  many 
classes  of  goods  differing,  for  entrepreneur  purposes,  some- 
times radically  in  kind,  and  commonly  differing  more  or 
less  in  degree.  That  there  are  differences  in  kind  is  evident : 
In  market  gardening,  as  in  grain  production,  there  must 
be  seed  to  go  with  the  land  and  labor  to  go  with  the  machines, 
no  matter  how  dear  or  how  cheap  the  land  or  seed  or  labor 
or  machines  may  be.  But  along  with  these  differences  in 
kind  there  go  differences  in  degree.  More  machinery  or 
more  fertilizers  or  more  labor  will  in  some  measure  make 
good  the  lack  of  land.  If  wages  are  high,  the  pressure  is 
strong  for  the  introduction  of  machinery ;  if  machinery  is 
dear,  labor  will  be  the  more  employed  in  its  stead.  In  coun- 
tries of  low  wages,  as,  for  example,  in  India  or  in  Mexico, 
the  entrepreneur  finds  the  machine  method  of  production 
the  more  expensive.  In  a  slave-holding  society,  labor  is 
likely  to  be  used  in  place  of  the  more  expensive  labor-saving 
appliances.  But  despite  the  fact  that,  with  every  change 
in  the  relative  prices  of  factors,  substitutions  and  redis- 
tributions of  factors  are  taking  place,  it  is  still  true  that  the 
principle  of  substitution  is  not  indefinitely  applicable.  There 
are  margins  of  choice  in  the  application  of  expense  to  the 
various  factors  —  margins  that  are  constantly  shifting  with 
every  change  in  the  arts  of  production  and  in  the  re^-ative 
prices  or  hires  of  the  factors.  But,  in  any  given  situation, 
the  limit  of  practicable  substitution  is  easily  reached,  though 
this  limit  must  be  differently  drawn  by  different  entrepre- 
neurs. Were,  indeed,  these  substitutions  possible  of  indefi- 
nite extension,  if  machinery  costs  could  be  fully  and  entirely 
2e 


418  THE  ECONOMICS  OF  ENTERPRISE 

substituted  for  labor  costs,  if  additional  labor  could  avail 
fully  to  atone  for  the  shortage  of  land,  if  machines  did  not 
require  attendance,  and  if  horses  did  not  need  drivers,  there 
could  lu^ver  set  in  any  relative  shortage  of  factors,  and  no 
disadvantage  could  ever  attach  to  anj'^  possible  proportion- 
ment  of  the  different  productive  factors.  Were  it,  for 
example,  always  and  without  disadvantage  possible  to  in- 
crease the  labor  investment  upon  any  given  piece  of  land, 
no  land  shortage  could  ever  manifest  itself,  and  rent  must 
disappear.  If  outlays  for  more  machinery,  or  for  more 
expensive  machinery,  could  go  on  indefinitely  without  the 
call  for  more  labor  to  go  with  the  machinery,  —  if,  that  is  to 
say,  machine  expenses  could  fully  and  everywhere  take  the 
place  of  labor  expenses,  —  developing  invention  would 
finally  deprive  labor  of  all  emplojinent. 

Evidently,  then,  differences  of  kind  exist  side  by  side  with 
differences  of  degree.  Were  differences  in  degree  not  pres- 
ent, substitution  would  be  impossible.  And  were  there  no 
differences  in  kind,  there  could  never  be  anyw^here  a  disad- 
vantage from  an  increase  of  expense  upon  a  fixed  supply  of 
land,  or  any  loss  from  20  laborers  working  at  one  loom,  or,  for 
that  matter,  any  reason  why  an  indefinite  number  of  wagons 
should  not  dispense  with  the  need  of  horses  and  drivers. 

Technological  differences  in  kind,  it  must  be  admitted, 
are  in  many  cases  so  marked  as  almost  to  prohibit  the  possi- 
bility of  substitution.  But  distinctions  that  are  technological 
are  not  necessarily  economic.  (See  Chap.  XI.)  And  it 
must  now  be  pointed  out  that  these  actual,  important,  and 
obvious  technological  distinctions  between  the  different  bases 
of  production  not  only  fall  short  of  justifying  the  threefold 
classification  into  land,  labor,  and  capital,  but  really  extend 
so  far  as  to  cancel  all  possibility  of  this  classification.  It  was 
earlier  shown  that  the  differences  and  specializations  are 
in  fact  as  marked  between  one  item  of  land  and  another,  or 
between  one  item  of  capital  goods  and  another,  or  between 
one  laborer  and  another,  as  between  capital  goods  and  labor, 
labor  and  land,  or  land  and  capital.     (See  Chap.  XI.) 

Number  of  classes  indefinite.  —  The  truth  is,  therefore, 
—  and  it  must  be  met  and  accepted,  —  that  if  the  factors 


FACTORS  OF  PRODUCTION  419 

of  production  are  to  be  distinguished  according  to  techno- 
logical tests  —  as,  for  certain  purposes,  they  clearly  must 
be  —  it  will  immediately  become  necessary  to  recognize 
not  two  or  three,  but  countless  classes  and  varieties  of  pro- 
ductive factors.  There  are  lands  especially  adapted  to  dif- 
ferent crops  —  some  of  these  lands  adapted  only  at  a  great 
loss  to  any  other  crops  — ■  and  lands  of  different  grades  for 
all  of  these  different  adaptations.  And  there  are  timber 
lands  and  mining  lands  and  grazing  lands  and  hunting  lands 
and  fishing  waters.  Other  lands,  again,  are  good  for  nothing 
but  for  building  purposes,  others  good  for  nothing  but 
wharves.  And  among  the  building  lands  there  are  lands  for 
shops,  for  residences,  for  factories,  for  warehouses,  and  for 
railroad  yards.  And  many  of  these  purposes  are  not  even 
in  the  widest  sense  to  be  regarded  as  technological. 

And  so  with  machines  :  There  are  talking  machines,  flying 
machines,  spinning  machines,  sewing  machines,  mowing 
machines,  traveling  machines,  and  fishing  machines  —  ma- 
chines of  many  different  sorts  and  grades,  for  watch-making, 
for  cigarette  making,  for  milking,  for  massage,  for  music, 
for  adding,  for  multiplying,  for  tree  cutting  and  for  leg 
cutting,  for  killing,  and  for  resuscitating.  Why  rank  all 
these  as  technologically  one,  and  term  them  all  capital  purely 
by  reason  of  their  alleged  industrial  functions? 

Numberless  and  changing  interrelations :  Machines.  — 
And  not  merely  this :  there  are  all  sorts  of  technological 
relations  among  machines  and  appliances  —  relations  of 
substitution  and  of  competition,  of  interdependence  and  of 
mutual  need.  The  instances  are  many  in  which  one  kind 
of  a  machine  takes  the  place  of  another,  competes  with  it, 
limits  or  changes  its  field  of  application,  sends  it  to  the 
scrap  pile.  Electric  lights  are  displacing  lamps  and  gas  and 
coal  and  refining  plants.  As  the  cable  car  displaced  the  mule 
car,  as  the  automobile  is  displacing  the  carriage  and  the 
street  car,  as  the  electric  car  is  displacing  the  locomotive, 
so  the  aeroplane  may  some  day  take  the  place  of  all  the  others. 
Possibly  not  less  numerous  are  the  cases  where  the  existence 
of  one  machine  creates  a  field  of  uses  for  another  machine : 
recall  how  the  power  loom  waited  upon  the  spinning  jenny. 


420  THE  ECONOMICS  OF  ENTERPRISE 

With  labor.  —  The  same  variety  of  relations  —  now  of 
substitution  and  now  of  interdependence  —  is  found  among 
laborers  relatively  to  one  another  and  among  lands  relatively 
to  one  another.  More  masons  call  for  more  hod  carriers, 
more  carpenters  for  more  masons,  more  day  laborers  for 
more  supervisors,  more  agriculturists  for  more  artisans  — 
and  so  on  without  limit.  On  the  other  hand,  the  more 
typists,  the  fewer  amanuenses;  the  more  linotype  opera- 
tives, the  fewer  typesetters ;  the  more  chauffeurs,  the  fewer 
coachmen  and  cab  drivers.  As  the  physician  has  taken  the 
place  of  the  magician,  so  the  surgeon  may  some  day  dis- 
place the  physician  —  or  the  other  way  about  —  or  the 
bacteriologist  displace  both.  Why,  then,  classify  all  labor  as 
one? 

Likewise  with  land.  —  The  coal  lands  displace  the  wood- 
lots.  New  fisheries  would  probably  lower  the  demand  for 
pasture  lands,  and  perhaps  intensify  the  demand  for  cereal 
lands.  More  agricultural  lands  will  call  for  more  packing- 
house sites,  for  more  railroad  rights  of  way,  for  more  city 
terminals,  and  for  more  town  lots  for  city  dwellers. 

Interdependences  and  substitutions  between  classes.  — 
That  these  relations  of  mutual  need  on  the  one  hand,  and  of 
competition  and  substitution  on  the  other,  exist  not  merely 
within  each  of  the  three  traditional  classifications,  but  still 
oftener  and  more  intricately  across  the  lines  of  the  tradi- 
tional classifications,  is  still  clearer  and  is  still  more  disas- 
trous for  these  classifications.  Some  machines  take  the 
place  of  labor ;  other  machines  offer  a  new  demand  for  labor, 
either  in  the  making  or  in  the  operating  or  in  both.  Not 
rarely  a  new  process  requiring  little  or  no  machinery,  but 
only  or  mostly  labor,  displaces  expensive  capital  appliances. 
With  wireless  telegraphy,  for  example,  the  last  ocean  cable 
may  have  been  laid  and  the  existing  cables  be  fated  to 
abandormient. 

Or,  again,  the  discovery  of  more  productive  varieties  of 
grain,  or  the  development  of  new  methods  of  cultivation,  like 
subsoiling  or  bacterial  inoculation,  may  throw  much  of 
the  poorer  land  out  of  cultivation.  Or  more  plows  —  a 
change   in   capital  equipment  —  may   do  the   same   thing. 


FACTORS  OF  PRODUCTION  421 

Better  technique  of  transportation,  i.e.,  better  labor,  or  better 
transportation  equipment,  i.e.,  better  machinery,  make 
accessible  lands  previously  inaccessible.  Economically,  there- 
fore, though  not  geographically,  they  create  land.  And 
meantime  they  throw  out  of  cultivation  the  poorer  grades  of 
near-by  land.     (See  Chap.  XII.) 

The  classifications  indicted.  —  It  is,  then,  evident  that 
the  threefold  classification  of  productive  factors  fails  (1) 
in  excluding  from  capital  much  that  is  clearly  capital,  e.g., 
land,  (2)  in  including  within  capital  only  a  small  share  of 
the  remaining  things  that  are  equally  capital,  e.g.,  credits, 
franchises,  patents,  etc.,  (3)  in  attempting  to  base  the  classi- 
fication of  factors  upon  purely  technological  grounds,  (4) 
in  constructing  upon  these  grounds  a  classification  that 
inadequately  reports  —  and  mostly  misrepresents  —  the 
actually  existing  technological  relations,  (5)  in  presenting  a 
classification  which,  with  the  continuous  and  progressive 
changes  in  technique,  must  require  for  each  different  entre- 
preneur a  constant  redistribution  of  the  subject  matter  classi- 
fied, (6)  and  in  imposing  the  logical  necessity  of  carrying 
so  far  the  construction  of  new  classes  and  subclasses  as 
finally  to  leave  the  case  precisely  where  it  was  in  the  begin- 
ning —  in  substance,  an  attempt  to  classify  what  will  not 
classify,  or  will  classify  only  upon  lines  which  are  constantly 
changing. 

This  chapter  having  emphasized  the  fact  that  there  are 
countless  technological,  or  mechanical,  directions  of  cost 
in  the  productive  process,  and  countless  corresponding  bases 
of  costs,  and  that  there  are  countless  other  directions  of 
cost,  some  resting  upon  bases  that  are  not  technological 
or  mechanical  in  any  sense  —  the  next  chapter  will  examine 
the  proportions  in  which  the  different  factors  and  different 
bases  of  cost  are  best  employed  in  production.  It  will  be 
shown  that  the  Law  of  Diminishing  Returns  as  applied  to 
land  is  merely  one  aspect  or  application  of  a  law  applicable 
over  the  entire  field  of  production  and  of  gain,  and  appli- 
cable equally  to  all  the  different  bases  of  cost  —  which 
broader  law  will  be  termed  the  Law  of  the  Proportion  of 
Factors;    that  this  law  has  social  as  well  as    competitive 


422  THE  ECONOMICS  OF   ENTERPRISE^ 

renderings;  that  in  either  rendering  it  has  both  static  and 
dynamic  aspects  —  the  static  aspects  referring  merely  to  the 
current  working  of  things  under  any  assumed  set  of  condi- 
tions, the  dynamic  aspects  referring  to  the  trend  of  things, 
to  certain  or  probable  changes  in  the  conditions,  and  to  the 
effects  wliich  nmst  attend  these  changes ;  that,  in  all  com- 
petitive renderings,  tlie  Law  of  Proportions  means  merely 
that  for  purposes  of  gain  the  entrepreneur  must  rightly 
apportion  his  price  costs  among  their  different  bases,  techno- 
logical or  other,  or  must  suffer  in  his  price  gains ;  that,  in 
its  social  bearmgs,  the  law  points  merely  to  the  effects  upon 
the  aggregate  social  product  which  must  attend  any  excess 
or  defect  in  the  relative  supplies  of  technological  factors. 

Examination  also  of  the  forces  and  tendencies  indicated 
under  the  Law  of  Increasing  Returns  will  advise  its  renaming 
as  the  Law  of  Advaiitage  and  Size. 


CHAPTER  XXIII 
LAWS  OF  return:   profitable   proportions:   profitable 

SIZE 

The  industrial  facts.  —  That,  as  men  acquire  larger  knowl- 
edge, strength,  and  technical  skill,  they  become  more  effective 
producers  of  wealth ;  that  with  larger  and  larger  supplies 
of  any  consumable  good,  there  must  go  a  smaller  importance 
attaching  to  each  successive  unit  of  supply ;  that,  upon 
any  given  area  of  land,  successive  increments  of  product 
are  obtainable  only  on  terms  of  increasing  difficulty  per 
unit  of  product ;  that,  in  many  lines  of  production,  the 
greater  business  has,  in  point  of  economies  of  production, 
the  advantage  over  the  smaller  business  —  are  propositions 
no  one  of  which  is  markedly  economic  or  technical  in  import, 
or  of  a  nature  to  present  overserious  difficulty  of  compre- 
hension, or  of  a  character  to  offer  especial  temptations  to 
controversy. 

Not  precisely  so,  however,  for  the  same  propositions  as, 
after  subjection  to  the  necessities  of  economic  analysis,  re- 
interpretation  for  the  purposes  of  economic  investigation, 
and  reformulation  for  the  purposes  of  economic  doctrine, 
they  present  themselves  transformed  and  rearranged  into 
the  well-known  "  economic  laws  of  return." 

The  ultimate  principle  underlying  what  is  commonly 
known  as  the  law  of  diminishing  returns,  and  underlying 
this  law  in  all  its  different  applications,  is,  when  stated  in 
its  most  general  form,  an  almost  self-evident  truth,  namely, 
that  disadvantage  attends  any  excess  or  defect  in  the  supply  of 
productive  factors  relatively  one  to  another.  This  large  gen- 
eral law  we  shall  term  the  law  of  the  Proportion  of  Factors. 
It  affirms  nothing  more  than  the  disadvantage  from  bad 

423 


424  THE  ECONOMICS  OF  ENTERPRISE 

combination  in  all  production  and  in  all  business  under- 
takings. 

Social  and  competitive  :  Static  and  dynamic.  —  As  is  gen- 
erally true  with  economic  principles,  this  law  has  its  social 
and  its  competitive  aspects.  In  its  purely  private  and  com- 
petitive form  —  as  will  later  appear  —  it  means  not  much 
more  than  that,  in  economic  activities,  as  mostly  elsewhere 
outside  of  the  nursery,  the  asylum,  and  the  poorhouse,  "fools 
get  the  worst  of  it."  But  in  its  social  aspects  the  law  runs 
in  terms  more  courteous. 

For  society  in  the  aggregate,  the  main  significance  of  the 
law  is  found  in  the  field  of  history  or  of  prophecy — of  ret- 
rospect or  prospect.  In  this  sense  it  is  a  law  in  social  dy- 
namics ;  it  elucidates  the  economic  bearing,  upon  society 
as  a  whole,  of  certain  changes  in  the  general  situation  :  What 
effects  must  these  changes  have  had?  Or,  taking  place  in 
the  future,  what  will  be  their  effects  ? 

The  general  principle  involved  has,  however,  its  static 
formulation :  What  is  the  present  meaning  of  the  existing 
relative  supplies  of  productive  agents  and  instruments? 

The  social-static  formulation.  —  It  is  evident  that  society 
may  be  badly  circumstanced  by  virtue  either  of  a  scant 
aggregate  equipment  of  productive  instruments,  relatively 
to  the  number  of  laborers,  or  of  an  equipment  relatively  scant 
in  particular  directions.  And  it  is  equally  clear  that  the 
situation  may  be  a  fortunate  one  —  for  such  members  of 
society  as  there  are  —  by  the  fact  that  the  membership  is 
a  small  one  relatively  to  the  supplies  of  land  and  other  in- 
strumental goods.  If  the  per  capita  equipment  in  lands  or 
appliances  is  generous,  the  society,  taken  as  an  aggregate,  is 
so  far  fortunate,  —  the  average  level  of  comfort  is  a  higher 
level. 

The  transition  from  the  static  to  the  dynamic  aspect  is  easily 
made,  —  is  indeed  almost  inevitable.  Whatever  is  dynamic  leads 
merely  to  a  new  application  of  static  doctrine.  That  is  to  say,  in 
order  to  appraise  the  significance  of  the  dynamic,  there  is  always 
necessary  another  appeal  to  the  static :  only  so  is  it  possible  to 
appraise  the  significance  of  the  change.  The  dynamic  aspects 
of  any  problem  refer  merely  to  the  forces  at  work  to  make  the  situa- 


LAWS  OF  RETURN  425 

tion  a  new  and  different  situation.  But  in  each  new  situation  there 
is  notliing  new  but  the  situation :  the  static  doctrine  is  still  valid ; 
the  problem  in  its  setting  of  new  terms  remains  in  principle  and  in 
method  of  analysis  the  same  problem. 

The  social-dynamic  formulation.  —  Society  is  advantaged 
by  every  change  making  for  a  more  generous  aggregate  equip- 
ment of  productive  instruments  relatively  to  the  number  of 
laborers  or  making  for  an  equipment  relatively  more  gen- 
erous in  any  particular  direction.  The  social  significance 
of  this  Law  of  Proportions  is,  therefore,  —  be  it  repeated,  — 
mainly  to  be  sought  in  the  field  of  history  or  of  prophecy. 

To  illustrate  :  The  Black  Death  in  England  may  be  taken  to  have 
swept  away  one  half  of  the  population  of  England,  leaving,  however, 
unimpaired  the  supply  of  land  and  of  other  productive  equipment. 
It  thereby  became  possible  for  the  remaining  population  to  enjoy 
the  advantages  of  a  better  per  capita  equipment  of  land  and  ap- 
pliances. Conditions  were  favorable  to  the  resultfulness  of  human 
effort.  Doubtless  there  were  also  changes  in  the  terms  of  the  dis- 
tribution of  this  product  among  the  different  cooperating  factors ; 
but  with  the  purely  distributive  and  competitive  and  individual 
aspects  of  the  case  this  social  formulation  of  the  Law  of  Proportions 
is  not  concerned. 

And  so,  again,  were  the  present  population  of  the  world  to  be 
doubled,  all  other  things  remaining  the  same,  the  per  capita  prod- 
uct of  industry  must  suffer. 

Likewise,  also,  if  a  population  remaining  unchanged  in  point 
of  numbers  were  to  acquire  a  doubled  per  capita  labor  effectiveness, 
whether  by  improved  technique  or  by  development  in  strength, 
or  in  intelligence,  or  in  intensity  of  effort,  the  social  product  would 
not  thereby  be  doubled  unless,  together  with  this,  there  should  take 
place  a  proportionate  change  in  the  supply  of  land  and  of  other 
equipment.  And  all  tliis  means  merely  that  if  some,  but  not  all, 
of  the  productive  factors  are  doubled,  the  product  will  not  fully 
double. 

It  is  clear  that  this  social-dynamic  aspect  of  the  law  in  question 
was  the  sole  phase  with  which  Malthus  was  logically  concerned  in 
his  formulation  of  the  social  menace  of  increasing  population.  For 
the  purposes  of  Malthus'  argument  nothing  need  have  been  de- 
duced as  to  the  bearing  of  expanding  population  upon  land  rents. 
Nothing  was  necessarily  inferred  as  to  the  trend  of  wages  relatively 
to  the  other  distributive  shares.     Neither  private  ownership  in 


426  THE   ECONOMICS  OF  ENTERPRISE 

land  nor  private  ownership  in  any  of  tlie  productive  equipment  was 
necessarily  assumed.  The  fornmhition  was  equally  valid  for  the 
collectivist  or  for  the  competitive  society.  The  investigation 
bore  solely  on  the  ratio  of  product  to  population, — on  the  rewards 
of  industrj'^  as  over  against  the  pain-costs  or  the  time-costs.  The 
product  was  regarded  in  the  woight-and-tale  aspect,  or,  at  most, 
as  reduced  to  some  sort  of  utility  denominator  for  average  or  social 
purposes.  No  suggestion  of  the  competitive  or  of  the  market-value 
calculus  was  pertinent  to  the  problem. 

The  competitive  formulation.  —  But  in  a  society  competi- 
tively organized  the  private  and  competitive  value  aspects 
of  the  Law  of  Proportions  press  insistently  for  hearing.  In 
its  most  general  and  inclusive  statement  the  competitive 
law  runs  in  substantial  parallel  with  the  general  social  law : 
Disadvantage  in  price  return  accrues  to  the  individual  from 
any  excess  or  defect  in  the  relative  proportions  of  his  factors 
of  production.  This  is  the  competitive  and  individual  aspect 
of  the  law  of  the  bad  combination  of  factors. 

First,  however,  the  static  aspect.  —  The  explanations 
for  this  badness  of  combination  may  be  various.  In  one 
way  or  another  the  entrepreneur  has  unskillfully  gone  about 
his  undertaking,  has  attempted  to  get  on  with  too  much 
or  too  little  land,  has  oversupplied  or  undersupplied 
himself  with  machinery  or  with  seed  or  with  fertilizers, 
has  hired  too  few  or  too  many  laborers  or  laborers  of  the 
wrong  sorts  or  grades,  or  has  not  correctly  proportioned  the 
different  grades  to  one  another. 

But,  even  so,  this  static  formulation  has  two  important 
aspects,  aspects  only  with  great  difficulty  distinguished, 
aspects  which,  in  fact,  have  never,  in  the  history  of  Political 
Economy,  been  consistently  distinguished,  but  which  none 
the  less  make  imperative  demand  for  careful  and  consistent 
distinction :  (1)  The  law  may  refer  to  purely  technological 
considerations,  to  the  fact,  e.g.,  that  in  market  garden- 
ing or  in  grain  production  there  must  be  seed  to  go  with  the 
land,  or  that  labor  must  stand  in  some  sort  of  proportion 
to  machinery,  no  matter  how  high  the  wage  or  how  cheap 
the  machinery ;    (2)  but,  for  ordinary  competitive  purposes, 


LAWS  OF  RETURN  427 

it  is  evident  that  a  wise  combination  of  factors  must  depend 
mainly  upon  the  relative  hires  or  costs  at  which  these  factors 
are  to  be  had.  This  follows  from  the  fact  that  all  competitive 
entrepreneur  computations,  both  of  cost  and  of  product, 
run  in  terms  of  price  outlay  as  over  against  price  product. 
No  one  combination  of  factors,  therefore,  can  be  asserted 
to  be  the  best  for  purposes  of  the  entrepreneur,  and  to  be 
diverged  from  only  with  disadvantage,  unless  upon  the 
assumption  of  an  established  relation  of  prices  among  the 
various  factors  employed.  With  each  change  in  relative 
prices  a  new  combination  comes  to  be  the  best  combination. 
It  is,  in  fact,  only  by  this  dependence  of  the  amount  of  the 
employed  factor  upon  the  price  of  that  factor  that  the  con- 
stant redistributions  and  substitutions  of  factors  become 
possible.  If  wages  are  high,  the  pressure  is  strong  toward 
the  introduction  of  machinery;  in  countries  of  low  wages, 
machinery  is  little  called  for ;  if  land  commands  high  rent, 
it  pays  to  increase  the  proportions  of  labor  or  of  fertilizers 
or  of  implements. 

But,  as  we  have  already  seen  in  an  earlier  chapter,  these 
substitutions  are  commonly  possible  only  within  fairly  re- 
stricted limits,  and  on  terms  of  increasing  difficulty.  It  is, 
indeed,  because  these  substitutions  are  limited  in  their 
scope  that  it  is  possible  for  any  factor  to  become  relatively 
scarce  and  for  the  necessity  to  arise  for  the  observance  of 
due  proportions  among  factors.  If,  for  example,  indefi- 
nitely more  labor  could  be  applied  to  a  given  area  of  land, 
without  progressively  meager  returns,  there  could  never 
be  any  such  thing  as  a  scarcity  of  land  ;  and  land  being  plenty 
relative  to  the  need,  rent  could  never  emerge.  It  is  thus 
evident  that  the  existence  of  rent,  as  a  price  fact,  is  partly 
conditioned  on  certain  fundamental  requirements  in  the 
technique  of  agriculture. 

Differences  in  entrepreneurs.  —  This  dependence  of  one 
factor  of  production  upon  another,  this  impossibility  of 
indefinite  substitution,  requires,  therefore,  that,  in  the 
competitive  price  process  in  which  the  factors  are  employed, 
the  entrepreneur  combine  wisely  the  different  factors.  But 
precisely  because  the  entrepreneurs  are  different  one  from 


428  THE  ECONOMICS  OF  ENTERPRISE 

another,  botli  in  abilities  and  in  financial  resources,  each 
dilTeront  entreprcniun"  must  have  his  one  best,  and  different, 
method  and  proportion  for  the  combining  of  the  factors. 
Even  if  all  farmers  are  equally  skillful,  this  would  neither 
require  nor  permit  that  they  hire  or  buy  the  same  quantity 
or  kind  of  land,  or  manage  their  enterprises  in  precisely  the 
same  way. 

It  is  also  clear  that  it  is  the  possibility  of  the  substitution 
of  factors  that  presents  to  each  entrepreneur  his  peculiar 
problem  of  how  best  to  proportion  the  different  factors  in 
his  enterprise,  and  requires  also  that  each  entrepreneur 
solve  his  problem  in  his  own  peculiar  and  different  way. 
And  it  is  equally  clear  that  there  could  be  no  problem  of 
proportions  for  any  entrepreneur,  were  these  substitutions 
possible  without  limit.  There  is  a  partial  independence  of 
each  factor,  due  to  its  possibility  of  substituting  itself  for 
the  other  factors ;  but  there  is  also  a  partial  dependence  by 
virtue  of  the  limited  possibility  of  this  substitution.  The 
technological  relations  are  thus  again  shown  to  be  funda- 
mental to  the  price  relations. 

On  the  whole,  however,  it  is  evident  that  the  more  impor- 
tant technological  relation  between  the  factors  is  the  rela- 
tion of  interdependence ;  each  factor  employs  the  other 
rather  than  takes  the  place  of  the  others.  Thus  the  supply 
of  any  one  factor  is,  in  a  sense  and  to  a  limited  degree,  the 
basis  of  a  demand  for  other  factors  to  go  with  it.  Machinery 
does  not,  on  the  whole,  take  the  place  of  men,  but  calls  in- 
stead for  more  men.  Wagons  would  be  useless  without 
drivers,  pastures  without  cattle,  meadow  lands  without  pas- 
ture, iron  and  iron  mines  without  coal  and  coal  mines,  cars 
without  locomotives,  and  so  on  indefinitely. 

But  note  again  that  there  is  nothing  in  all  these  relations  to  justify 
the  threefold  classification  of  productive  factors.  If  human  beings 
are  to  constitute  one  class,  as  distinguished  from  machinerj'^  con- 
stituting another,  on  the  basis  that  each  must  have  the  other  to  go 
with  it,  —  the  complementary  relation,  —  it  is  to  be  objected  that 
men  sometimes  take  the  place  of  machines  and  are  in  turn  often 
displaced  by  machines ;  constantly  and  extensively  agricultural 
machinery  is  driving  labor  to  the  towns.     Nor  are  the  relations  be- 


LAWS  OF  RETURN  429 

tweeu  different  laborers  quite  satisfactory  as  a  basis  for  including 
all  labor  in  one  economic  classification ;  in  the  same  field  of  employ- 
ment and  in  the  same  general  grade  of  labor,  laborers  compete 
against  one  another ;  laborers  of  different  field  or  grades  are  demands 
for  one  another ;  the  more  masons  the  more  hodcarriers ;  the  more 
of  the  unskilled,  the  more  overseers  and  supervisors  —  and  so  on 
indefinitely.  So  again,  some  machinery  calls  for  other,  and  some 
displaces  other. 

But,  in  other  connections,  all  these  interrelations  have  been  suffi- 
ciently emphasized  in  earlier  chapters  —  as  has  also  the  truth  that 
both  the  complementary  relations  and  the  relations  of  substitution 
are  constantly  changing,  depend  at  any  particular  time  on  the  par- 
ticular situation  in  point  of  technique,  and  have  at  no  time  and  in  no 
situation  the  slightest  relation  to  the  land-labor-capital  classification. 
In  any  case,  however,  it  is  obvious  that  the  necessity  of  abandoning 
this  threefold  classification  of  factors  can  tend  in  no  way  to  impeach 
the  Law  of  the  Proportion  of  Factors  as  here  presented,  or  to  limit 
its  scope,  but  must  apply  rather  to  support  and  to  emphasize  it  and 
vastly  to  extend  its  scope. 

Confused  formulations.  —  In  the  interests  both  of  safety  and  of 
accuracy  great  care  must  be  taken  that  all  competitive  formulations 
of  the  Law  of  Proportions  run  consistently  in  terms  of  price.  For 
competitive  purposes  the  following  formulations  are  evidently 
wide  of  the  point  unless  amended  along  the  lines  suggested  in  the 
brackets.  "  In  agriculture  ...  by  increasing  the  labor  [expense] 
the  produce  is  not  increased  [in  price]  in  equal  degree  " ;  ^  or  "The 
application  of  increased  [expense  for]  capital  [goods]  and  labor  to 
land  will  add  a  less  than  proportionate  amount  to  the  [aggregate 
price  of  the]  produce  raised  "  ;2  or  "Additional  investments  of  labor 
[expense]  and  capital  .  .  .  yield  a  proportionate  increase  in  [price] 
product "  ;  ^  or  "In  the  extractive  industries  the  continual  investment 
of  [capital  in]  labor  and  capital  [goods]  on  any  given  tract  of  land  will 
.  .  .  yield  a  diminishing  proportionate  return  [in  price]  " ;  *  or 
"After  a  certain  point  has  been  passed  in  the  cultivation  of  an  acre 
of  land  .  .  .  increased  applications  of  [expense  for]  labor  and  capital 
[goods]  yield  less  than  proportionate  returns  in  [price]  product  "  ;  ^ 
or  "  Whenever  double  the  amount  of  [pajonent  for]  exertion  yields 
more  than  double  the  amount  of  [price]  products,  we  are  in  the 

^  Mill,  Principles  of  Political  Economy,  Book  I,  Chap.  XII,  Sec.  2. 

'^Marshall,  Principles  of  Economics,  4th  ed.,  p.  230. 

^  Bullock,  Quarterly  Journal  of  Economics,  Vol.  XVI,  p.  475. 

^  Ihid.,  p.  480.  ^  Seager,  Introduction  to  Economics,  p.  114. 


430  THE  ECONOMICS  OF  ENTERPRISE 

presence  of  the  Law  of  Increasing  Returns  or  Decreasing  Costs. 
When  double  the  [payment  for]  exertion  just  doubles  the  [price] 
output,  we  have  the  Law  of  Constant  Returns  or  Constant  Cost  "  ;  ^ 
or  "  In  the  case  of  agricultiu-al  land  .  .  .  additional  doses  of 
[expense  for]  cajntal  [goods]  and  labor  will  yield  a  relatively  smaller 
[price]  produce."  ^ 

Land  costs,  labor  costs,  material  costs,  wage  costs,  and  oppor- 
tunity costs,  all  require  rendering  over  into  the  denominator  of 
price  or  of  entrepreneur  capital,  and  nmst  be  set  over  against  a  total 
of  price  product  before  the  so-called  Law  of  Diminishing  Return  or 
any  other  law  of  return  can  come  to  be  relevant  to  the  entrepreneur 
computation.  Land  as  superficies,  plus  labor,  machinery,  seed  and 
fertilizers  somehow  aggregated,  cannot  be  compared  with  weight- 
and-tale  product,  and  still  less  with  price  product. 

Nor  can  any  formulation  be  strictly  to  the  purpose  of  the 
entrepreneur  analysis,  when  the  costs  are  duly  aggregated  into 
value  and  price  totals,  but  are  set  over  against  mere  quantity  of 
product.  Quantity  of  product  appeals  to  the  entrepreneur  only  as 
it  may  directly  traiLslate  into  price  of  product.  And  this,  indeed, 
it  may  often  do,  but  onlj'-  on  condition  that  the  product  of  the 
enterprise  is  a  relatively  small  one  and  the  competitors  many. 
But  in  anj^  case  the  competitive  law  must  be  made  exclusively  a 
price  law,  either  in  terms  or  by  interpretation. 

Inferences  from  the  competitive-static  law.  —  But  what, 
now,  is  the  significance  of  the  Law  of  Proportions  talven  in 
the  competitive  and  in  the  purely  static  sense?  Does  tlie 
law  in  any  sense  throw  light  on  the  determination  of  prices  ? 
No  social  law  of  return  —  whether  static  or  dynamic  —  is 
relevant  to  the  price  adjustment.  Nor,  so  far  as  we  have 
yet  gone  with  the  competitive-static  analysis,  have  we  at 
all  advanced  ourselves  for  any  purposes  of  the  price  problem. 
To  assert  that  the  less  shrewd  the  entrepreneur  in  fixing  the 
relative  proportions  of  factors,  the  smaller  will  be  his  price 
product,  does  indeed  vaguely  hint  of  the  profits  accruing 
to  him  relatively  to  his  competitors,  —  says  in  substance 
that  here  as  elsewhere  the  unskillful  man  gets  the  worst  of 
things,  but  makes  no  deliverance  as  to  prices.  True  it  is 
that,  if  entrepreneurs  should  become  more  capable  in  any 

^  Seliginan,  Principles  of  Economics,  p.  250.         ^  Ibid.,  p.  306. 


LAWS  OF  RETURN  431 

industry,  prices  might  thereby  be  affected,  but  this  is  to 
smuggle  dynamic  facts  into  a  purely  static  problem. 

Nor  has  any  basis  been  so  far  offered  for  inferences  as  to  distribu- 
tion, unless  perhaps  with  this  single  reference  to  profits.  We  have 
only  a  greater  or  smaller  total  of  price  product  relatively  to  the  total 
of  price  costs,  accordingly  as  the  productive  factors  have  been  well 
or  ill  combined.  But  in  this  there  is  nothing  to  indicate  whether 
wages  will  rise  or  fall,  either  absolutely  or  relatively  to  rent  or  in- 
terest, —  nothing  to  show  that  rent  will  gain  or  lose  in  the  total  or 
in  relation  to  any  other  distributive  share.  We  have,  in  fact,  arrived 
at  nothing  better  than  an  entirely  obvious  conclusion  as  to  the 
profits  of  entrepreneurs  relatively  to  one  another. 

More  than  a  land  law.  —  But,  so  far  as  the  competitive- 
static  law  is  valid  and  serviceable,  —  and  for  whatever 
purposes  it  is  valid  and  serviceable,  —  it  is  obviously  a  law 
equally  applicable  to  all  the  cooperating  productive  factors. 
It  is  not  in  any  especial  degree  a  law  of  agricultural  produc- 
tion ;  nor  is  it  a  law  valid  only  by  virtue  of  the  presence  and 
the  use  of  land,  and  in  the  degree  solely  of  this  presence  and 
use. 

Where,  then,  shall  warrant  be  found  for  the  doctrine  — 
purely  as  a  static  formulation  —  that  if  land  is  relatively 
scarce,  land  rent  must  be  high  relatively  to  other  costs? 
Or  that  if  laborers  are  scarce,  their  wages  are  likely  to  be 
high?  Or  that  a  restriction  of  loan  fund  means  high  in- 
terest rates,  other  things  remaining  the  same?  Or  that 
machine  rents  are  commonly  high  if  the  particular  kind  of 
machine  is  difficult  —  costly  —  to  obtain  ? 

Doubtless  all  these  propositions  are  valid ;  but  for  these 
particular  and  specific  laws  no  justification  has  yet  been  given. 
And  more  than  this,  —  the  distributive  analysis  necessary 
to  justify  any  one  of  these  formulations  is  an  analysis  both 
difficult  and  delicate.  All  this,  however,  will  become  clearer 
in  our  examination  of  the  Law  of  Proportions  in  its  fourth 
and  last  aspect,  the  competitive-dynamic. 

More  than  a  technological  law.  —  In  view,  however,  of  the  ar- 
gument of  the  preceding  chapter,  some  surprise  and  some  protest 
may  be  expected  at  the  prevailingly  technological  emphasis  so  far 


432  THE  ECONOMICS  OF  ENTERPRISE 

given  to  the  law  of  proportions.  But,  in  fact,  no  criticism  was  there 
directed  against  the  recognition,  in  economic  discussion,  of  these 
technological  relations,  but  only  to  the  recognition  of  these  relations 
exclusively.  No  question  was  there  made  or  is  here  made  that 
technological  aspects  are  important  in  most  productive  enterprises 
—  in  preparing  stocks  for  the  market  there  must  obviously  be  print- 
ing presses  —  but  it  was  there  pointed  out,  and  nmst  here  be  em- 
phasized, that  technological  factors  in  production  are  not  the  only 
factors  involved,  that  there  are  other  technological  factors  than  land 
and  machinery,  and  that  the  threefold  classification  does  not  ten- 
ably  classify  even  such  technological  factors  as  it  includes.  There 
are,  in  fact,  many  sorts  of  each  of  these  three ;  there  are  factors, 
with  their  attendant  costs,  which  have  small  technological  signifi- 
cance ;  and  there  are  others  which  have  none.  Even  in  farming, 
with  its  obvious  land  and  machines  and  labor,  not  only  are  there 
different  kinds  of  macliinery,  difTerent  grades  and  sorts  of  labor, 
different  qualities  of  land  of  differing  applications,  but  there  are 
also  risks  of  hail  and  drought  and  disease  and  fire  and  financial 
stress.  There  are  freights  and  taxes.  There  are  fertilizers  and  in- 
secticides. There  are  secret  formulae  —  at  a  dollar  each  —  for 
making  hens  lay  and  for  curing  foot-rot  in  sheep.  There  are  ad- 
vertising outlays  to  the  end  of  marketing  a  special  brand  or  strain 
of  fancy  stock.  There  are  trips  to  town  and  dues  at  the  Grange. 
There  are  subscriptions  to  agricultural  journals,  and  contributions 
to  the  traveling  agent  who  never  delivers  the  goods.  And  all  of 
these  are  costs  incidental  to  the  business,  and  incurred  in  the  process 
of  getting  grain  and  cattle  and  eggs  upon  the  market. 

But  none  the  less,  all  the  while,  this  law  of  proportions  holds, 
abating  neither  jot  nor  tittle  of  its  meaning  and  force.  The  out- 
lays for  insurance  must  be  appropriate  to  the  size  of  the  business, 
the  smaller,  relatively,  as  the  risks  are  widely  scattered,  the  larger 
as  the  enterprise  is  not  financially  equipped  or  organized  to  meet 
sudden  strains  or  to  redistribute  its  resources  promptly.  As  the 
barns  and  sheds  must  be  in  due  relation  to  the  working  cattle,  the 
dairy  animals,  and  the  farm  machinery,  so  the  different  laborers 
must  be  fitted  to  the  various  tasks.  Likewise  the  overhead  expenses 
of  insurance,  travel,  and  taxes  must  be  held  in  due  proportion  to  the 
product  marketed.  The  advertising  must  neither  be  too  niggardly 
nor  overexpensive ;  nor  must  it  be  badly  selected  in  method  or 
kind.  The  outlays  in  experiments  with  new  processes,  new  cus- 
tomers, new  formulae,  and  new  lightning-rod  agents  must  conform 
to  the  nature  and  size  of  the  undertaking,  and  must  be  made  with 
due  regard  to  the  total  financial  resources  and  to  the  measure  of 


LAWS^OF  RETURN  433 

loss  which  the  general  condition  of  the  business  can"  carry  without 
menace  of  severe  financial  pressure.  And  the  use  of  credit  must  be 
safely  within  the  security  which  may  be  offered  and  the  amount  and 
kind  of  disposable  collaterals.  The  business  must  not  be  per- 
mitted to  tie  up  an  overlarge  share  of  its  funds  in  credit  accommoda- 
tions to  customers.  Nor  must  the  bank  balances  be  so  scant  as  to 
forbid  of  taking  prompt  advantage  of  attractive  cash  bargains,  nor 
yet  so  large  as  to  permit  of  waste  upon  idle  funds.  And  not  merely 
this :  but  the  choice  of  a  business  and  the  nature  of  the  business, 
the  nature  of  its  departments  and  the  size  of  each,  the  qualities 
of  the  employed  men,  the  grades  and  kinds  of  machinery  and  of 
work  cattle  and  of  breeding  stock,  the  safe  volume  of  credit  and  of 
debt,  —  must  all  be  affected  by  the  breadth  of  grasp,  the  fitness 
and  resourcefulness  and  the  peculiar  experience  of  the  particular 
entrepreneur.  On  the  one  hand  he  must  have  care  to  resti-ict  his 
operations  to  conform  to  his  managerial  capacity  and  to  his  super- 
visory abilities ;  on  the  other  hand  he  must  not  allow  any  part  of 
his  supervisory  abilities  to  run  to  waste.  Everything  in  proportion ; 
"  The  great  bad,"  as  Jane  Carlyle  remarked,  "  is  in  mixing  things," 
—  badly. 

The  competitive-dynamic  formulation.  —  Here,  again,  the 
step  from  the  static  to  the  dynamic  is  so  ready  of  making  as 
to  be  almost  inevitable.  Whatever  is  true  for  the  analysis 
of  the  static  situation  before  the  dynamic  influences  have 
come  to  apply  will  in  doctrine  and  inethod  hold  for  the  analysis 
of  the  situation  in  its  new  setting.  For  a  full  treatment  of 
the  dynamic  aspects  of  our  problem  we  should  therefore  have 
to  inquire  (1)  as  to  the  influences  resulting  in  changes  in 
the  relative  supplies  of  particular  factors,  or  in  the  relative 
demands  for  products,  or  in  the  technological  relations  be- 
tween the  various  productive  factors ;  (2)  as  to  the  bearing 
of  these  changes  (a)  upon  the  total  of  the  entrepreneur's 
product  in  terms  of  price  relative  to  his  costs  in  terms  of 
price,  (6)  upon  the  relative  changes  in  his  outlays  for  the 
various  cost  factors,  —  that  is  to  say,  upon  the  terms  of  the 
distribution  of  his  price  product.  For  some  of  the  costs  to 
the  entrepreneur  are  distributive  shares  to  the  recipients. 

Nothing  in  the  way  of  explanation  can  be  offered  here  for  the 
various  modifications  in  human  beings  affecting  either  the  demand 
for  goods  or  the  supply  of  goods.     Men  in  the  average  or  in  the 
2f 


434  THE  ECONOMICS  OF  ENTERPRISE 

agsfogate  change  in  numbers,  in  needs  and  desires,  and  in  the  rela- 
tive strength  of  their  different  needs  and  desires.  As  productive 
agents,  they  change  in  health,  strength,  endurance,  industry,  moral 
qualities,  and  in  social  and  economic  institutions  —  in  their  devel- 
opment of  credit  institutions,  of  transportation  methods,  and  of  the 
technique  of  production  generally.  Changes  in  the  human  term  of 
the  economic  problem  arc  important  also  in  regard  to  the  disposi- 
tion to  save  for  the  future  and  in  regard  to  the  direction  in  which 
this  provision  is  sought.  Saving  partly  conditions  social  capital- 
ization. 

Nor  for  the  environmental  aspects  or  the  equipment  aspects  of 
production  can  more  be  done  here  than  to  suggest  the  Unes  of  change 
that  are  open — the  multiplication  of  tools,  machines,  and  appliances, 
the  subjugation  of  new  fields,  the  opening  up  of  new  continents, 
all  the  minor  modifications  of  the  enviromnent  due  to  men,  and, 
finall}^,  the  great  total  of  modifications,  climatic  or  other,  which  are 
be5^ond  the  reach  of  men  to  cause  or  to  prevent. 

Nothing,  indeed,  is  both  practicable  and  worth  doing  here  further 
than  briefly  to  note  the  bearing  of  relative  increases  in  the  supplies 
of  productive  factors  upon  the  values  of  the  products  especially  due 
to  them,  and  upon  the  relative  distributive  shares  imputed  to  them 
out  of  the  jointly  produced  values. 

Service  wider  than  price  discussion.  —  It  was  surely  never 
a  great  or  an  important  discovery  with  regard  to  prices  that, 
if  they  change  at  all,  they  must  either  go  up  or  go  down. 
Equally  safe,  and  of  equal  significance,  was  the  corresponding 
deliverance  with  regard  to  costs :  if  they  do  not  remain 
constant,  they  will  rise  or  they  will  fall.  There  is,  indeed, 
some  question  w^hether  a  scientific  law  can  properly  be  any- 
thing other  than  a  grouping  of  phenomena  with  relation  to 
one  specific  causal  influence,  —  some  question,  that  is  to 
say,  whether  a  formulation  asserting  merely  the  outcome 
and  resultant  of  the  composition  of  several  different  cooperat- 
ing influences  is,  in  any  proper  sense  of  the  word,  a  law  at  all. 
But,  unless  as  coming  under  this  objection,  there  can  surely 
be  no  harm  —  and  no  service  —  in  indicating  by  the  Law  of 
Constant  Return  the  sheer  fact  that  prices  will  turn  out  not  to 
change,  or  in  dignifying  by  the  name  Diminishing  Return  a 
trend  toward  rise  in  price,  or  in  understanding  by  Increas- 
ing Return  a  probable  or  certain  fall  of  price. 


LAWS  OF  RETURN  435 

But  the  competitive-dynamic  law  of  proportions  may 
reasonably  be  expected  to  bear  more  desirable  fruit  than 
this.  Taking  it  as  granted  that  changes  are  to  occur  in  the 
relative  supplies  of  productive  agents  and  instruments,  an 
inquiry,  or  a  series  of  inquiries,  may  certainly  be  made  as 
to  the  resultant  trend  of  prices.  And  there  is  no  doubt 
also  that,  as  matter  of  detail  and  of  process  in  a  competitive- 
entrepreneur  economy,  this  trend  of  things  would  perforce 
express  itself  as  a  change  in  relative  costs.  But  the  entre- 
preneur costs  are  themselves  results  of  the  changing  aggre- 
gate situation,  and  only  as  intermediate  terms  in  a  longer 
causal  sequence  to  be  regarded  as  causes  of  any  sort.  The 
ultimate  determinant  of  the  high  price  of  any  product  is 
to  be  found  in  the  scarcity  of  the  productive  factors  upon 
which  the  forthcoming  of  the  product  is  conditioned. 

Bearings  on  distribution.  —  No  detailed  discussion  or  analysis 
of  the  distributive  process  is  practicable  here.  Enough  has  perhaps 
been  said  to  indicate  that  all  such  laws  of  return  as  report  the  ab- 
solute or  relative  share  of  any  price  product  imputed  to  any  item 
or  class  of  productive  factors  are  rather  laws  summarizing  the  dis- 
tributive outcome  than  indicating  or  reporting  the  play  of  causal 
forces  and  the  direction  of  the  causal  sequence.  They  are  not  so 
much  laws  illuminating  other  problems  as  deriving  illumination 
from  other  solutions.  At  best  they  merely  furnish  the  cost  under- 
pinning for  the  superficial  entrepreneur-cost  explanation  of  market 
price.  But,  even  from  the  entrepreneur  point  of  view,  the  prices 
of  the  costs  look  as  much  like  results  of  price  as  like  causes  of  price. 

One  caution,  however,  must  be  here  repeated :  It  has  long  been 
the  vicious  habit  of  economists  to  proceed  directly  from  changes  in 
the  supply  of  productive  factors  to  the  changing  values  of  these 
factors,  —  to  assume,  that  is,  that  the  analysis  valid  for  the  price 
determination  of  consumable  goods  may  be  safely  applied  to  pro- 
duction goods.  But  again  be  it  said  that  the  causal  sequence  runs 
not  directly  from  the  supply  of  instruments  to  the  price  of  the  in- 
struments, but  first  from  the  supply  of  instruments  to  the  supply 
of  products,  then  to  the  price  of  products,  and,  only  as  the  last 
step,  to  the  price  of  instruments.  The  law  of  the  falling  price  of 
a  consumable  good  with  an  increasing  supply  of  that  good  holds  in 
its  usual  formulation  only  because  the  demand  schedule  with  any 
one  fine  of  consumption  goods  may  be  taken  as  a  fixed  fact.  New 
suppUes  can  be  marketed  only  on  terms  of  such  prices  as  shall  tap 


436  THE  ECOXOMICS  OF  ENTERPRISE 

lower  levels  of  price-paying  disposition.  If,  however,  the  increase 
is  one  of  a  productive  agent,  tluu-e  results  a  new  and  larger  volume 
of  price  product  and  a  rearrangement  of  the  conditions  of  demand. 
The  new  level  of  remuneration  is  to  be  worked  out  only  as  the  out- 
come of  a  new  problem  of  distribution.  There  is  assumed  a  new 
volume  of  price  product  to  be  imputed  to  a  new  and  a  rearranged 
and  readjusted  set  of  productive  agents.  So,  then,  with  population 
increasing  relatively  to  the  other  factors,  there  maj''  be  expected 
a  fall  in  the  level  of  wages,  but  this  only  by  virtue  of  two  influences : 

(1)  a  less  than  proportional  increase  in  the  product  to  be  distributed  ; 

(2)  less  favorable  terms  of  distribution  for  labor  relatively  to  the 
other  agents  concerned  in  the  technological  process.  (See  Chap. 
XV.) 

Dynamic  applications.  —  It  is  evident,  then,  that  the  corol- 
laries of  this  Law  of  Proportions,  taken  in  the  dynamic  and 
competitive  sense,  are  many  and  important.  The  appli- 
cations are  far  wider,  far  more  difHcult,  and  far  more  signifi- 
cant than  a  mere  analysis  of  the  bearing  of  all  the  different 
possible  changes  in  the  supplies  of  productive  factors  (popu- 
lation changes  among  all  the  rest),  upon  prices  in  general, 
upon  prices  of  agricultural  products  in  the  aggregate,  and 
upon  prices  of  specific  agricultural  products.  For  there 
are  also  the  various  distributive  problems.  Taking  for 
granted  an  aggregate  social  product,  greater  or  smaller, 
and  taken,  as  already  solved,  the  problem  of  the  prices  of 
these  products,  there  remain  to  be  analyzed  the  terms  and 
proportions  under  which  these  various  price  products  are  to 
be  distributed  among  the  cooperating  factors,  each  share 
being  regarded  not  merely  in  the  aspect  of  an  absolute  com- 
pensation, but  also  as  a  compensation  relative  to  the  other 
compensations. 

For  example,  what  must  be  the  effect,  both  absolutely  and  rel- 
atively, of  changes  in  population  upon  land  rents,  machinery  rents, 
wages,  profits,  and  discount  rates?  What  effect  from  changes  in 
per  capita  technological  efficiency?  From  changes  in  the  supphes 
of  skilled  labor  of  different  sorts?  Of  unskilled  labor?  From  ex- 
panding credit  and  increasing  loan  fund?  From  changes  in  the 
supplies  of  machines  and  appliances,  both  in  volume  and  in  land? 
From  changes  by  the  opening  up  of  new  lands?  From  improving 
transportation  between  the  old  lands  ? 


LAWS  OF  RETURN  437 

And  it  may  be  noted,  also,  in  relation  to  the  changes  in 
the  prices  of  consumption  goods,  that  this  Law  of  Propor- 
tions is  fundamental  to  the  study  of  the  incidence  of  commod- 
ity taxes  upon  consumers,  —  the  process  of  forward  shifting ; 
while,  as  explaining  the  modifications  in  rent,  profits,  wages, 
and  time  discounts,  as  distributive  shares  out  of  a  jointly 
produced  product,  this  law  is  fundamental  to  an  understand- 
ing of  the  process  of  backward  shifting. 

To  resume,  then :  This  Law  of  the  Proportions  of  Fac- 
tors, in  no  matter  which  one  of  its  varying  formulations  and 
applications,  derives  its  validity  from  the  limitations  upon 
the  substitution  of  factors  one  for  another.  But  the  combi- 
nations and  factors  with  which  it  has  to  do  are  legion.  It 
breaks  up  into  sublaws :  (1)  of  social  application,  both 
static  and  dynamic ;  (2)  of  competitive  application,  both 
static  and  dynamic.  These  laws  of  the  competitive  sort  have 
a  wide  range  of  subordinate  formulations  and  applications, 
—  among  others,  bearings  upon  the  values  of  consumable 
goods  of  every  sort,  upon  the  distributive  shares  of  cooper- 
ating productive  factors  indefinite  both  in  variety  and  in 
technological  combination,  upon  discount  rates,  upon  the 
distribution  of  tax  burdens,  and  upon  the  capitalized  values 
of  such  productive  factors  as  are  subject  to  the  capitalizing 
process. 

The  law  of  advantage  and  size.  —  For  some  purposes  the  use  of 
the  terms  Diminishing  and  Increasing  Returns  is  extremely  unfor- 
tunate, not  merely  because  each  of  the  terms  has  come  to  be  used 
in  a  perplexing  variety  of  meanings,  but,  more  seriously  still,  because 
of  the  misleading  antithesis  implied. 

For,  evidently,  if  disadvantage  goes  with  the  unskillful  combina- 
tion of  cost  factors,  it  must  also  be  true  that  advantage  goes  with 
the  skillful  combination.  If  in  one  case  loss  occurs  through  adding 
a  factor  already  in  sufficient  supply,  it  must  be  equally  the  case  that 
advantage  accrues  through  increasing  the  supply  of  a  factor  not  yet 
adequately  present.  If  a  faUing  rate  of  compensation  goes  with  the 
making  of  certain  increases,  it  is  thereby  implied  that  more  of  some- 
thing else  is  needed  to  arrive  at  the  best  proportions  between  factors. 
And  if  the  bad  management  manifested  in  the  bad  proportioning 
of  factors  is  indicated  under  the  Law  of  Diminishing  Returns, 


438  THE  ECONOMICS  OF  ENTERPRISE 

should  not  the  Law  of  Increasing  Returns  connote  the  good  results 
that  go  with  the  wise  adjustment  of  factors?  But  this  would  be 
to  give  two  names  to  what  in  point  of  causation  is  only  one  law, — 
the  significance  of  the  bad  proportion  of  factors. 

And  more  than  this :  if  it  be  true  that,  while  disadvantage  is 
resulting  to  a  given  business  through  a  bad  proportioning  of  factors, 
an  equal  or  a  greater  advantage  may  at  the  same  time  be  reaped 
from  the  mere  fact  of  the  mere  size  of  the  business  unit,  —  if,  that 
is  to  say,  the  proportions  of  the  factors  may  have  one  causal  bearing, 
and  an  increase  or  a  decrease  in  the  size  of  the  unit  may  have  an- 
other bearing,  altogether  irrespective  of  the  question  of  proportions, 
there  is  evidently  another  difficulty  presented :  What  shall  we  call 
this  law  —  or  these  laws  —  of  good  or  ill  results  attendant  upon  the 
mere  matter  of  size  ?  Note,  also,  that  this  increase  of  size  may  be 
attained  by  adding  more  land  to  land  or  more  labor  to  labor  or 
more  instruments  to  the  instruments  already  in  hand.  The  pro- 
portions between  factors  may  have  little  or  no  significance.  If 
there  are  also  two  laws  here,  one  of  increasing  and  the  other  of 
diminishing  returns,  each  appropriate  accordingly  as  the  experience 
is  fortunate  or  unfortunate,  we  must  now  face  the  difficulty  not 
merely  of  having  two  laws  formulating  the  effects  of  one  cause,  but 
also  the  difficulty  of  using  the  same  pair  of  terms  for  two  entirely 
distinguishable  sets  of  causes. 

Assuming,  however,  so  far  as  we  may,  that  in  current  usage  some 
approximately  definite  meaning  has  attached  to  the  terms  "  Di- 
minishing "  and  "  Increasing  "  returns,  it  would  seem  desirable  to 
rename  the  Law  of  Diminishing  Returns  as  the  Law  of  the  Propor- 
tions of  Factors,  and  the  Law  of  Increasing  Returns,  as  the  Law  of 
Advantage  and  Size. 

Size  versus  proportions.  —  But,  even  so,  we  are  not  yet 
quit  of  all  our  perplexities.  For,  after  all  is  said,  many  of 
the  advantages  seemingly  dependent  on  the  sheer  increase 
in  the  size  of  the  business  unit  are  in  reality  the  mere  expres- 
sion of  the  fact  that  a  bad  proportion  has  hitherto  existed 
between  the  entrepreneur  factor  and  the  other  factors  in  the 
productive  complex.  May  not  this,  indeed,  be  the  ultimate 
explanation  for  all  the  advantages  going  with  the  giant 
business  and  for  the  trend  toward  progressive  consolidation  ? 
It  is  at  all  events  clear  that,  no  matter  how  many  other  classes 
of  factors  there  may  turn  out  to  be,  —  whether  three  or  three 
thousand,  —  entrepreneur  ability  forms  one  class,   at  the 


LAWS  OF  RETURN  439 

least.  And  this  factor,  or  these  factors,  of  entrepreneur 
ability  may  be  in  defect  or  in  excess  relatively  to  the  other 
factors  in  the  productive  combination.  The  entrepreneur 
may  have  in  charge  all  that  he  can  advantageously  attend 
to ;  or,  on  the  other  hand,  a  part  of  his  supervisory  and  man- 
agerial power  may  be  running  to  waste.  Is,  then,  in  itself, 
size  a  distinct  and  separate  cause  of  advantage?  This 
needs  looking  into. 

It  is  at  any  rate  to  be  said,  in  support  of  a  distinct  and 
separate  Law  of  Advantage  and  Size,  that  there  are  some 
lines  of  industry  and  some  conditions  in  which  there  early 
accrues  a  diminishing  advantage  with  increasing  size ;  e.g., 
in  farming  ordinarily  and  in  manufacturing  under  conditions 
of  the  limited  market  imposed  by  undeveloped  methods  of 
transportation.  This  situation,  commonly  especially  char- 
acteristic of  farming,  is  in  itself  an  illustration  of  the  very 
law  which  superficially  it  might  appear  to  deny.  Farming 
exemplifies  the  Law  of  Advantage  and  Size,  only  that  the 
advantage  goes  not  with  the  larger  business,  but  rather  with 
the  smaller. 

Not  merely  this,  but  the  Law  of  the  Proportion  of  Factors 
not  only  has,  as  we  have  seen,  a  technological  basis,  but  it 
implies,  in  any  given  set  of  cost  levels,  a  best  technological 
combination  in  relation  to  each  particular  entrepreneur.  It 
is,  after  all,  a  Law  of  Proportions  between  different  sorts  of 
costs,  some,  but  not  all,  of  which  are  based  upon  ultimate 
technological  relations.^ 

On  the  other  hand,  the  Law  of  Advantage  and  Size  has 
seemingly  little  relation  to  the  technological  situation,  and 
still  less  reference  to  the  technological  proportions  in  the 
business  unit.     For,  as  has  already  been  noted,  the  advan- 

^  Some  of  these  costs,  be  it  repeated,  are  truly  comiuonly  teelmo- 
logical,  but  it  is  equally  clear  that  some  are  commonly  not  so. 
Not  only  is  it  true  that  the  technological  factors  to  be  correlated 
are  legion,  but  also  that  there  are  other  costs  which  are  entirely 
lacking  in  the  technological  basis,  but  which  are  none  the  less 
submitted  to  the  necessity  of  proportion ;  e.g.,  insurance,  adver- 
tising, and  taxes,  and,  in  general,  those  lines  of  expense  connected 
with  administrative  and  sales  departments,  —  clerks,  bookkeepers, 
traveling  men,  and  the  like. 


440  THE  ECONOMICS  OF  ENTERPRISE 

tages  of  the  giant  industry  are  readily  attained  through 
the  addition  of  more  labor  to  labor  or  more  machines  to 
machines  or  more  land  to  the  land  already  employed.  The 
question  mostly  refers  to  the  size  of  the  investment,  the 
aggregate  operating  fund  in  terms  of  price,  irrespective  of 
its  technological  applications  or  of  the  apportionment  of 
this  aggregate  fund  among  the  different  sorts  of  cost  bases. 
Size  refers  here  not  to  the  kind  or  quantity  of  the  instru- 
ments and  appliances  of  production,  not  to  capital  in  the 
technological  sense,  but  rather  to  capital  in  the  competitive 
entrepreneur  sense,  as  the  total  price  of  the  resources  em- 
ployed in  the  business,  irrespective  of  its  technological  or 
nontechnological  application  or  apportionment,  whether  into 
land  or  labor  or  machinery  or  what  not. 

This  is  not  at  all  to  deny  that  many  undertakings  suffer 
from  a  lack  of  business  capital  relatively  to  entrepreneur 
ability,  —  suffer,  that  is,  from  the  fact  that  there  is  an  un- 
saturated margin  of  supervisory  power  which  is  running 
to  waste.  Cases  of  this  sort,  falling  accurately  within  the 
Law  of  Proportion  of  Factors,  are  easily  confused  with  other 
cases  properlj'-  falling  under  the  Law  of  Advantage  and  Size. 
But  the  distinction  is  theoretically  none  the  less  clear.  Sev- 
eral competing  producers  may  often  advantageously  unite, 
and  may  advantageously  retain  all  the  old  managers  as 
special  department  managers  or  as  together  constituting 
a  new  managerial  board.  The  aggregate  of  managerial 
effectiveness  may  be  appreciably  greater  through  this  fusion, 
and  may  stand  as  of  itself  an  illustration  of  the  general  Law 
of  Advantage  and  Size.  And  therevfith  may  go  also  other 
important  economies  and  efficiencies,  not  only  of  supervision 
and  organization  in  the  mechanical  processes  of  production, 
but  as  well  in  the  buying  of  raw  materials  and  in  the  sale 
and  the  delivery  of  the  product. 

The  Law  of  Advantage  and  Size  is,  therefore,  a  real  and 
valid  law  entirely  distinguishable  from  the  Law  of  Propor- 
tion of  Factors  and  in  no  sense  the  antithesis  of  it.  Any 
industry  may  easily  illustrate  both  laws  at  one  and  the  same 
time  —  may,  indeed,  illustrate  the  beneficial  working  of 
the  one  and  the  injurious  working  of  the  other.     The  under- 


LAWS  OF  RETURN  441 

taking  may,  for  example,  be  excellently  organized  in  point 
of  proportions  and  may  yet  be  either  too  large  or  too  small ; 
or  it  may  be  of  the  desirable  size  and  yet  relatively  over- 
supplied  with  capital  goods  or  with  plant  or  with  unspecial- 
ized  working  fund  or  with  land ;  or  it  may  be  overmanned ; 
or  it  may  be  inadequately  supervised. 

Comparative  advantage  in  competing  industries.  —  It  is,  however, 
important  to  note  that,  for  competitive  purposes,  the  law  of  changing 
proportional  price  productivity  with  changes  in  the  size  of  the  busi- 
ness unit  is  not  safely  to  be  taken  to  apply  in  any  one  line  of  industry 
taken  as  a  group,  but  only  to  the  competing  industries  inside  the 
group.  For  it  may  readily  be  true  that  the  organization  of  any 
industry  into  the  giant  form  may  so  reduce  the  costs  therein  that, 
even  with  an  expanding  product  by  weight  and  tale,  the  aggregate 
price  product  is  a  smaller  one.  And  this  might  hold  of  manufactur- 
ers as  a  whole  as  over  against  agriculture  as  a  whole. 

Nor  can  the  law  rightly  imply  that  greater  price  productivity 
goes  per  unit  of  expense  with  increasing  size.  This  is  not  neces- 
sarily true.  It  is  safe  to  assert  only  that  to  the  greater  industrial 
unit  goes  the  relatively  greater  product  or  profit.  For  when  the 
elasticity  of  consumption  is  not  great,  and  when  competition  among 
rival  businesses  is  close,  lower  prices  may  obtain  to  the  extent  of 
bringing  a  lower  price  productiveness  for  each  industrial  unit  and  a 
generally  lower  average  of  price  product  and  of  profit.  And  yet  it 
may  remain  true  that  the  larger  units  suffer  least. 

Nor  is  the  Law  of  Advantage  and  Size  concerned  with  the  fact  that 
in  industries  of  heavy  investment  and  of  heavy  fixed  charges  the 
extra  cost  of  successive  items  of  product  is  less  in  proportion  to  the 
increase  of  weight-and-tale  product,  —  a  formulation  which,  as  of 
necessity,  says  nothing  as  to  the  aggregate  increase  in  price  going 
with  the  increase  in  product,  but  leaves  it  possible  to  be  assumed  that 
the  entrepreneur  will  Umit  his  product  at  the  point  where  the  extra 
expense  of  production,  together  with  the  falling  prices  upon  the 
original  product,  balances  the  extra  price  represented  in  the  added 
items.  In  truth,  cases  of  this  sort  present  a  peculiar  illustration 
of  the  Law  of  Proportion  of  Factors  ;  for  its  best  results  —  demand 
for  products  and  prices  of  products  standing  at  a  given  level  — 
the  industry  is  calling  for  a  changed  proportion  of  productive 
factors,  or  it  is  being  found  true  that  the  proportion  of  factors,  best 
ordinarily  and  in  the  long  run  for  price  results,  is  not  the  best 
temporarily.    If,  for  long-run  purposes,  it  is  regarded  as  undesirable 


442  THE  ECOXOMICS  OF  ENTERPRISE 

to  make  an  all-round  increase  in  the  size  of  the  unit,  the  best  adjust- 
ment for  temponir^'  jiurposes  must  be  reached  through  a  propor- 
tionment  of  factors  which  would  be  a  maladjustment  for  long-time 
purposes.  Tliis  comes  about  through  the  fact  that,  as  a  long-time 
computation,  the  fixed  charges  must  be  counted  as  costs,  and  that 
in  this  computation  the  costs  must  stand  as  an  aggregate  of  price 
and  as  set  over  against  an  aggregate  product  in  price.  Cost  for 
long-time  purposes  is  rather  an  average  than  a  marginal  cost.  But 
in  the  short-time  reckoning  the  marginal  computation  is  valid,  if 
only  all  the  elements  are  propcrlj^  included.  To  this  sort  of  mar- 
ginal cost,  fixed  charges  are  for  the  most  part  irrelevant.  (See 
Chap.  XXV.) 

It  appears,  then,  that  to  find  out  what  there  really  is  in 
this  Law  of  Advantage  and  Size  it  is  necessary  rigidly  to 
exclude  all  influences  of  improving  technique  (developing 
human  beings)  and  all  influences  ranking  under  increased 
demands  for  products,  and  to  confine  ourselves  to  the  sheer 
competitive   advantages   of   combination   or   concentration 

(1)  for  increased  weight-and-tale  product  per  unit  of  expense, 

(2)  for  increased  price  product  per  unit  of  expense. 
Applies  in  what  industries.  —  It  is  obvious  that  no  a-priori 

reason  exists  why  this  Law  of  Increasing  Return  might  not 
characterize  all  industries.  If  it  does  not  or  if  it  does  so 
unequally,  the  reason  must  be  sought  in  the  peculiar  nature 
of  the  industry  in  question.  The  law  may  fail  to  hold  with 
certain  industries,  because  by  the  nature  of  the  instruments 
which  they  employ  or  of  the  processes  required  (e.g.,  as  with 
land),  the  business  unit  cannot  greatly  increase,  the  giant 
organization  being  impracticable ;  or  the  market  may  be  so 
limited  as  to  render  giant  organization  impossible.  And,  as 
has  already  been  seen,  the  law  is  clearly  not  one  referring  by 
necessity  to  the  interdependence  of  factors  or  to  the  constitu- 
tion of  the  business  unit  in  respect  to  the  factors  included. 

Range  of  applications.  —  It  remains  to  point  out  that  this 
Law  of  Advantage  and  Size,  like  the  Law  of  Proportion  of 
Factors,  has  also  its  different  aspects  of  service  accordingly 
as  it  is  taken  in  its  static  or  in  its  dynamic  aspects.  It  may  be 
invoked  to  explain  some  of  the  phenomena  of  rising  or  of 
falling  prices.     Or  its  service  may  lie  in  the  analysis  of  the 


LAWS  OF  RETURN  443 

tendency  of  profits  toward  rise,  or  fall,  or  differentiation ; 
or  its  significance  may  be  found  in  estimating  the  forces  mak- 
ing for  consolidation  or  for  monopoly  in  business  ;  or,  finally, 
some  bearing  may  conceivably  be  deduced  upon  land  rents, 
upon  the  wage  level,  and  upon  time-discount  rates.  That 
is  to  say,  this  law  also  is  fundamental  in  its  significance  for 
the  explanation  of  the  prices  upon  consumable  goods  and 
for  arriving  at  the  forces  determining  the  outcome  of  the 
distributive  process.  It  follows,  also,  that  this  law  must 
be  appealed  to  in  the  examination  of  the  forward  shifting 
of  tax  burdens  upon  consumers,  and  as  well  also  in  the  exam- 
ination of  backv/ard  shifting.  This  backward  shifting 
must  obviously  take  place  through  the  modification  of  the 
distributive  shares  apportioned  out  of  a  product  jointly 
produced  by  the  various  productive  factors.  A  tax  limiting 
the  market  for  any  product  and  appropriating  a  part  of 
the  reduced  total  of  price  will  not  merely  reduce  the  aggre- 
gate fund  of  price  to  be  shared  among  the  various  cooperat- 
ing factors,  but  commonly  also  will  appreciably  modify  these 
shares  relatively  to  one  another. 

The  Law  of  Diminishing  Returns  has  been  considered  in 
earlier  chapters  in  its  generally  recognized  relation  to  the 
cultivation  of  land,  to  the  rent  of  land,  and  to  the  prices  of 
agricultural  products.  This  chapter  has  raised  no  question 
as  to  the  validity  of  this  law,  but  only  as  to  the  ambiguous 
renderings  of  it,  and  to  the  failure  to  give  it  proper  extension 
over  the  general  field,  not  only  of  production,  but  of  all 
business  enterprise.  It  has  been  shown  that  even  with 
reference  to  the  employment  of  land,  the  law  has  sometimes 
been  given  a  social  emphasis  for  purposes  of  history  of  proph- 
ecy, sometimes  a  purely  technological  emphasis  for  pur- 
poses of  competitive  production ;  but  that  always  the  dis- 
cussion has  limited  itself  to  the  porportions  in  which  labor, 
or  machinery,  or  wage  outlays,  as  particular  expense  or  as 
aggregate  expense,  are  applied  to  land  —  the  land  being, 
in  turn,  sometimes  regarded  as  area,  at  other  times  as  a  farm 
unit,  and  at  still  other  times  as  a  price  investment ;  that 
these  ambiguities  and  confusions  have  resulted  from  several 
misconceptions  :  (1)  the  failure  to  perceive  that  the  principle 
of  disadvantage  from  a  poor  combination  of  factors,  and  of 


444  THE  ECONOMICS  OF  ENTERPRISE 

advantage  from  a  wise  combination,  is  api)lioa1)le  not  only 
to  the  relations  of  land  to  the  other  factors  in  jjroduction,  but 
also  to  tlie  relation  of  all  the  other  factors  to  land,  and  to  the 
relations  of  all  the  other  factors  to  one  another ;  (2)  the 
failure  to  recognize  that  the  law  has  social  statements  and 
applications,  with  reference  both  (a)  to  any  given  situation 
and  {b)  to  the  significance  of  modifications  of  any  given 
situation  past  or  future;  (3)  the  failure  to  see  that  the 
law  has  also  its  competitive  statement  and  applications,  in 
its  bearing  on  market  prices,  and  on  the  market  rents  both 
of  land  and  of  other  instruments  of  production,  and  on  the 
profits  of  any  entrepreneur ;  (4)  the  failure  to  appreciate 
that  the  competitive  rendering  of  the  law  has  equall}^  its 
static  and  its  djTiamic  aspects ;  (5)  the  failure  to  confine 
the  social  renderings  of  the  law  to  questions  of  the  aggregate 
or  the  per  capita  product  of  goods  in  society,  as  distinguished 
from  questions  of  prices,  rents,  and  distributive  shares ; 
(6)  the  failure  to  confine  the  competitive  renderings  of  the 
law  to  questions  of  price  costs  as  against  returns  in  terms 
of  price,  and  the  bearing  of  land  scarcity  strictly  to  price 
rents  and  price  wages  and  price  profits ;  (7)  and  finally 
the  error  to  which  all  the  other  errors  are  contributing  or 
subordinate  —  the  notion  that  land  stands  to  competitive 
business  in  some  distinct  and  peculiar  relation,  conforms 
to  different  laws,  controls  peculiar  incomes,  and  is  itself 
something  other  than  one  item  of  capital  among  many  other 
capital  items. 

It  has  also  been  shown  that  the  recognition  of  this  broad 
and  general  Law  of  Proportions  not  nerely  compels  the 
abandonment  of  the  distinction  between  land  and  capital, 
but  compels  also  the  abandonment  of  all  attempt  to  subject 
the  factors  of  production  to  any  principle  of  classification ; 
that  while  technological  factors  in  production  must  be  recog- 
nized, to  the  relations  between  which  the  law  of  proportions 
applies,  there  are  also  to  be  recognized  many  other  non- 
technological  factors  to  which  the  law  equally  applies ;  that 
as  the  costs  are  not  four  but  legion,  and  the  distributive 
shares  not  four,  but  legion,  so  the  factors  of  production  are 
legion  ;  that  the  interrelations  among  the  factors  are  infinitely 
complex  —  some  relations  of  substitution  and  some  comple- 
mentary relations,  l^ut  all  relations  which  are  in  process  of 
constant  change,  and  which  both  in  variety  and  in  mutability 
defy  fixed  classification. 


LAWS  OF  RETURN  445 

The  Law  of  Advantage  and  Size  formulates  the  relations 
between  the  sizes  of  business  units  and  the  derivative  gains. 
Certain  economies  and  certain  opportunities  are  controlled 
by  the  size  of  the  industrial  or  business  unit ;  the  question 
is  not,  for  this  purpose,  the  ratio  between  the  factors,  but 
the  size  of  the  undertaking  as  a  whole,  the  proportions 
possibly  remaining  unchanged.  When,  however,  the  chief 
economy  of  size  is  in  the  possibility  of  achieving  a  better 
proportion  of  factors,  the  line  between  the  two  laws  is  not 
so  easily  drawn.  Size  being,  however,  fundamental  to  the 
best  proportions,  the  advantage  must  be  recognized  as  attach- 
ing ultimately  to  the  size.  In  any  case,  this  Law  of  Advan- 
tage and  Size  has  no  necessary  connection  with  technological 
considerations  either  of  process  or  of  product.  It  points 
merely  to  the  aggregate  volume  of  capital  investment,  in 
no  matter  what  directions,  —  a  price  total,  —  and  concerns 
merely  the  greater  or  smaller  competitive  power  attaching 
to  the  change  in  size.  This  law  will,  therefore,  greatly 
illuminate  our  later  analysis  of  cost  of  production  under  the 
giant  organization,  and  likewise  the  analysis  of  the  recent 
trend  of  industry  and  of  business  toward  both  concentration 
and  monopoly. 

The  following  chapter  will  especially  analyze  the  relations 
of  the  aggregate  supplies  of  the  different  productive  factors 
to  the  remunerations  which  these  factors  respectively  com- 
mand, and  therefore  to  the  distribution  of  incomes  in  society. 
Some  special,  though  slight,  attention  will  be  given  to  the 
effects  of  increasing  population  on  rents  and  on  wages  All 
the  problems  to  be  considered  are,  then,  to  be  recognized 
as  rather  of  the  dynamic  than  the  static  group.  But  as 
these  changes,  being  future,  are  conjectural,  and  indefinitely 
great  in  number,  and  indefinitely  various  in  degree,  the 
possible  permutations  in  the  hypotheses  make  exhaustive 
discussion  impossible,  and  allow  only  of  the  selection  of 
certain  specific  problems  for  illustrative  discussion.  The 
chapter  will,  therefore,  accomplish  not  much  more  than  to 
prove  that  not  much  can  be  accomplished. 


CHAPTER  XXIV 

DISTRIBUTION    AND    THE    LAW    OF    PROPORTIONS 

Distributive  versus  cost  analysis.  —  Already  in  the  ex- 
amination of  cost  of  production  many  distributive  problems 
and  processes  have  unavoidably  come  under  discussion. 
Not  all,  clearly,  but  some  entrepreneur's  costs  are  also  dis- 
tributive shares.  But  the  cost  analysis  regards  these  sums 
not  from  the  point  of  view  of  him  who  receives  the  pay,  but 
of  him  who  pays  —  from  the  point  of  view  of  the  one  to 
whom  the  costs  are  resistances,  rather  than  from  the  point 
of  view  of  those  to  whom  they  are  remunerations.  To  the 
entrepreneur  the  selling  price  must  stand  as  indemnity  for 
the  sums  which,  as  costs,  he  has  dispensed.  So  far,  therefore, 
as  the  analysis  of  entrepreneur  costs  has  disclosed  the  processes 
by  which  the  various  entrepreneur  outlays  are  determined  — 
outlays,  among  others,  for  labor  and  land  and  machinery  — 
so  far  has  a  distributive  analysis  been  completed.  It  need 
not  matter,  for  the  purpose  in  hand,  how  many  classes  of 
productive  factors  are  to  be  recognized,  or  into  how  many 
different  varieties  each  of  these  classes  is  to  be  subdivided. 

Exaggeration  of  technology.  —  But  that  danger  signals  are  neces- 
sarj''  here  is  proved  by  the  course  which  the  traditional  distributive 
analysis  has  actually  taken :  (1)  Production,  and  therefore  dis- 
tribution, have  conmionly  been  interpreted  as  processes  in  which 
only  technological  factors  are  involved.  (2)  The  influences  which 
the  presence  of  other  factors  may  exert  upon  the  distributive  share 
of  any  given  factor  —  the  mutual  relations  and  interactions  of  the 
factors  —  are  prone  to  be  interpreted  as  presenting  that  hmited 
number  of  combinations  and  applications  possible  with  only  three 
or  four  separate  productive  factors,  whereas,  in  fact,  the  combina- 
tions and  interactions  are  legion.  (3)  The  distribution  which 
takes  place  under  the  entrepreneur  process  of  cost  outlay  in  pro- 

446 


LAW  OF  PROPORTIONS  447 

duction  has  been  presented  as  the  sole  distributive  process;  not 
only  are  all  entrepreneur's  costs  assumed  to  be  limited  to  wages, 
profits,  rent,  and  interest,  but  it  is  also  assumed  that  the  entrepreneur 
cost  categories  are  the  only  distributive  categories.  Hence  the 
productivity  theory  of  distribution :  that  all  incomes  accrue  by 
productive  contribution  and  —  accurately  or  approximately  — 
accrue  according  to  productive  contribution.     (See  Chap.  X.) 

What  factors  are  technological  ?  —  That  the  outlays  of  production 
are  concerned  with  innumerable  different  factors,  and  that  many  of 
the  costs  are  applied  in  directions  lacking  all  technological  character, 
we  have  already  seen.  It  must,  indeed  be  admitted  that  the  line 
between  the  technological  and  the  nontechnological  is  difficult  to 
trace.  Outlays  for  transportation  —  the  method  by  which  you  get 
goods  to  your  customer  —  may  be  taken  to  be  technological.  But 
advertising  expenses  —  the  ordinary  way  by  which  you  get  your 
customer  to  come  to  you  —  are  equally  clearly  not  technological. 
If,  however,  the  advertising  be  by  steam  whistle  or  by  electric 
searchhght,  the  case  does  not  look  so  clear ;  the  process  is  techno- 
logical, only  it  has  not  to  do  with  the  making  of  the  product,  but 
solely  with  the  marketing.  It  is  financial  and  pecuniary  rather  than 
mechanical  and  industrial.  Take,  for  example,  the  business  of  mak- 
ing automobiles  :  The  producing  of  the  cars  —  the  task  of  the  me- 
chanical department  —  is  technological.  The  inspecting  depart- 
ment may  also  be  so  regarded,  though  not  quite  so  confidently. 
The  sales  department  is  clearly  not  so.  To  speak  here  of  factors  of 
production  would  be  inappropriate.  True,  good  advertising,  in 
place  of  good  workmanship  or  of  good  inspection,  may  serve  to 
stimulate  a  demand  for  goods,  but  has  nothing  to  do  with  bringing 
about  the  existence  of  the  goods  as  objective  material  facts.  The 
advertising  method  is  perhaps  more  effective  for  gain  than  is  me- 
chanical efficiency,  but  it  is  another  kind  of  method.  The  more  the 
advertising  that  goes  with  a  cigar,  the  less  good  tobacco  you  are 
likely  to  get  for  your  money.  To  declare  that  all  the  processes 
involving  cost  and  promising  gain  are  technological,  and  that,  since 
there  is  nothing  else  to  invest  in,  all  gainful  investment  must  per- 
force be  distributed  among  the  three  technological  factors,  land, 
labor,  and  capital,  is  either  to  violate  the  distinctions  upon  which  the 
threefold  classification  is  based,  or  is  deliberately  to  abandon  any 
attempt  at  preserving  the  distinctions.  In  the  dark  all  cats  are 
gray.  The  very  impossibility  of  making  precise  destinction  between 
what  is  technological  and  what  is  not,  must  somewhat  discredit  the 
distinction  as  a  basis  of  classification. 


448  THE  ECONOMICS  OF  ENTERPRISE 

Interdependence  and  substitution.  —  It  was  suggested 
in  the  last  chapter  that  the  Law  of  the  Proportion  of  Factors 
has  some  important  distributive  aspects.  Precisely  because, 
between  the  difTiTcnt  factors  of  production,  there  are  ulti- 
mate interdependences  of  the  technological  sort,  together 
with  other  interdependences  which  are  in  no  degree  techno- 
logical, it  comes  about  that  there  are  different  degrees  of 
desirability  in  the  different  possible  combinations  of  factors. 
For  each  different  entrepreneur  there  is  his  one  best  com- 
bination in  view  of  what  the  different  factors  are  costing. 
If  lumber  is  cheap  and  feed  is  dear,  the  skillful  farmer  will  save 
feed  by  building  better  sheds  and  bams.  At  the  given  level 
of  the  various  costs,  too  much  or  too  little  of  any  factor  gives 
bad  results  in  price. 

But  that  there  can  be  too  much  or  too  little  of  any  one 
factor  proves  (1)  that  there  is  an  actual  interdependence, 
and,  (2)  that  substitutions  of  one  factor  for  another  are  in 
some  degree  possible,  (3)  but  that  these  substitutions  have 
their  limit.  The  fact  that,  with  any  change  in  the  relative 
prices  of  the  factors,  the  best  combination  is  a  new  combina- 
tion is  merely  a  further  proof.  No  combination  could  be 
better  than  another  in  price  results,  were  it  not  for  the  ulti- 
mate differences  of  factors  in  the  productive  process  or  in  the 
business  process.  Those  differences  which  exist  irrespective 
of  the  prices  of  the  factors  are  precisely  the  reasons  for  the 
differences  that  attend  the  different  relative  prices,  and  are 
the  reasons  for  the  new  combinations  which  attend  new 
levels  of  prices. 

Distribution  favors  the  relatively  scarce.  —  A  corollary 
of  this  —  or,  perhaps  better,  a  restatement  of  it  —  runs  to 
the  effect  that,  for  any  relatively  scarce  factor  in  his  process, 
the  entrepreneur  can  afford  to  pay,  if  he  must,  a  relatively 
large  hire  or  price.  Restated,  this  amounts  to  saying  that 
the  distributive  outcome  is  the  more  favorable  to  the  factor 
that  is  relatively  scarce.  When  spinners  are  plenty,  weavers 
will  be  dear.  When  lumber  is  cheap,  there  will  be  the  greater 
demand  for  carpenters.  High-priced  building  sites  limit 
the  number  of  dwellings.  The  key  to  the  situation  is  the  best 
paid  thing  in  the  situation.     As  highly  trained  men  become 


LAW  OF  PROPORTIONS  449 

less  rare  relatively  to  the  men  who  are  to  be  supervised  and 
directed,  salaries  will  fall  relatively  to  wages.  As  employing 
ability  becomes  better  and  more  plenty,  the  wage  share  in 
industry  will  be  increased  —  so  far,  at  least,  as  the  situation 
remains  competitive.  The  multiplication  of  skilled  labor 
will  in  general  help  unskilled  labor  —  unless,  indeed,  the  land- 
lord shall  intervene  at  the  aggregate  expense  of  both.  All 
this  merely  repeats  that  the  relative  scarcity  of  any  factor 
is  the  explanation  of  the  high  significance  of  it  to  the  entre- 
preneur, of  the  high  remuneration  that  he  can  afford  to  ad- 
vance for  it,  of  the  high  cost  that  he  will  have  to  submit  to  if 
he  gets  it,  and  of  the  high  distributive  share  that  goes  with  it. 
Von  Wieser  puts  the  case  effectively  as  follows  : 

A  demand  for  means  of  production  arises  only  when,  on  the  one 
hand,  we  are  obliged  to  employ  them  or  else  go  without  what  they 
produce ;  and  when,  on  the  other  hand,  we  can  employ  them,  in- 
asmuch as  we  have  at  our  disposal  the  necessary  complementary 
goods.  ...  It  follows  .  .  .  that  the  effective  demand  for  means 
of  production  must  vary,  not  only  when  there  is  a  variation  in 
personal  wants,  but  also  when  there  is  a  variation  in  the  quantity 
of  complementary  goods. ^ 

Each  factor  affects  the  other's  share.  —  It  is,  then,  not 
open  to  question  that  the  supply  and  the  derivative  hire  or 
cost  of  any  factor  in  production  —  e.g.,  land,  machinery, 
transportation,  insurance,  police  protection  —  must  have 
of  necessity  a  direct  and  important  bearing  upon  the  re- 
muneration of  other  factors,  e.g.,  upon  the  wages  of  labor,  the 
profits  of  entrepreneurship,  the  rents  of  houses,  the  prices 
of  fuel  or  of  hides.  Dense  population  hurts  wages,  not  only 
by  diminishing  the  average  per  capita  output  of  product,  but 
in  carrying  to  the  landlords  a  larger  share  of  this  more 
scanty  product.  The  demand  for  plows  is  doubtless  deriv- 
ative from  the  demand  for  foods,  but  not  directly.  In  any 
event,  it  is  equally  to  be  said  that  the  supply  of  land  furnishes 
the  demand  for  plows ;  lumber  affords  a  demand  for  nails, 
horses  for  wagons,  wagons  for  horses,  plows  for  land,  men  for 
plows,  plows  for  men,  horses  for  stables,  stables  and  horses 

1  Wieser,  Natural  Value,  p.  102. 
2g 


450  THE  ECONOMICS  OF  ENTERPRISE 

for  carpenters  and  for  stable  boys,  horses  and  wagons  for 
harnesses  and  for  drivers,  etc. 

Population  and  wages.  —  But  what,  in  truth,  other  things 
remaining  unchanged,  is  the  bearing  of  increasing  population 
upon  the  wage  level? 

To  make  the  question  accurately  intelligible  it  must  be 
assumed  that  the  different  grades  and  kinds  of  labor  increase 
proportionally.  And  even  then,  will  it  do  to  assert  that 
wages  must  fall  ?  How  comes  it  to  be  true,  if  it  is  true,  that 
the  volume  of  population  influences  the  wage  level?  Is  it, 
for  example,  possible  to  say,  with  Professor  Carver,  that 
"  the  wages  of  labor  are  determined  by  an  equilibrium  of 
two  forces,  —  the  productivity  of  labor,  on  the  one  hand, 
creating  the  demand  for  it,  and  the  standard  of  living,  on  the 
other  hand,  limiting  the  supply  of  it"  ? 

Confusion  of  static  with  dynamic.  —  Not  at  all  denying 
the  bearing  of  these  two  forces  as  somehow  influencing  wages, 
each  in  its  own  way  and  time,  it  is  yet  to  be  objected  that 
the  ways  and  the  times  are  separate ;  that  the  offered  ex- 
planation of  wages  is  really  a  mixture  of  long-time  and  short- 
time  influences,  — •  on  the  one  side  a  static  category,  a  situa- 
tion, —  on  the  other  side  a  dynamic  variant  making  for 
possible  changes,  and  then  a  balance  somehow  struck  between 
them.  The  analysis  neither  stays  in  nor  abandons  the  field 
of  entrepreneur  wage  costs,  but  confuses  the  costs  as  they 
are  with  the  supposed  causes  of  the  costs,  and  with  possible 
or  probable  variations  of  the  costs.  But,  even  so,  the  argu- 
ment is  open  to  further  serious  criticism ;  for  in  reality  the 
standard  of  living  is  itself  a  derivative  from  the  productivity 
of  the  labor.  The  standard  of  living,  as  fixing  the  popula- 
tion-supply term,  and  as  set  over  against  productivity  as  the 
demand  term,  will,  then,  hardly  serve  as  a  full  explanation 
of  wages.  In  turn,  also,  the  productivity  of  the  labor  is 
derivative  from  the  supply  of  labor  —  so  far,  at  least,  as 
population  affects  the  case  at  all. 

Equating  now  against  then.  —  But  however  this  may  be, 
it  is  in  any  case  clear  that  as  a  question  of  existing  wages  the 
productivity  of  to-day  cannot,  for  any  purpose  of  present  costs 


LAW  OF  PROPORTIONS  451 

or  present  wages,  or  under  any  entrepreneur  computation, 
be  equated  against  the  labor  supply  of  some  years  hence. 
The  supply  then  bears  solely  on  productivity,  and  solely  on 
productivity  then  —  two  productivities,  twenty  years  apart. 
The  wages  of  all  the  yesterdays  and  of  to-day  may  possibly 
have  something  to  do  with  the  supply  of  labor  twenty  years 
hence ;  and  the  supply  of  labor  of  that  time  will  doubtless 
equate  against  the  demand  of  that  time.  The  supply  of 
to-day  has  precisely  that  same  relation  to  the  demand  of  to- 
day. To-day  there  is  no  equating  of  the  demand  or  supply 
or  product  of  to-day  with  the  demand  or  supply  or  product 
of  any  other  time.  Any  alleged  effect  from  wages,  through 
standards  of  living,  on  the  supply  of  labor,  —  whether,  on 
the  one  hand,  the  position  urged  be  that  high  wages  and  high 
standards  of  living  stimulate  the  birth  rate  and  the  per- 
centage of  maturities,  or  whether,  on  the  other  hand,  the 
effect  be  asserted  to  be  precisely  the  reverse  —  may  be  equally 
well  admitted  or  denied  with  equal  irrelevancy  to  all  problems 
of  the  current  adjustment  of  wages ;  productivity  is  as  it  is. 
Investigation  of  these  lines  of  influence  is,  then,  merely  a  more 
or  less  successful  attempt  at  a  historical  explanation  of  the 
present  labor  supply,  and,  so  far  as  the  labor  supply  has  to  do 
with  the  individual  wage,  is  an  attempt  to  explain  some  of 
the  causes  of  the  present  conditions  controlling  or  influencing 
the  ruling  level  of  wages.  But  the  ruling  level  of  wages  will 
be  the  same  whether  or  not  the  historical  explanations  offered 
be  well  supported.  So  the  wages  to  rule  twenty  years  hence 
may  to-day  be  possible  of  vague  conjecture  ;  and  in  the  mak- 
ing up  of  the  prophecy  some  bearing  may  be  ascribed  to  the 
expected  population  totals  of  that  time ;  and  these  totals 
may,  with  more  or  less  justification,  be  attributed  to  the 
standards  of  living  prevailing  to-day.  But  all  this  is  proph- 
ecy, and  has  nothing  to  say  for  the  wages  of  to-day. 

Population:  Standard  of  living:  Wages. — Nor  —  and 
this  is  the  important  fact  for  the  present  discussion  —  even 
after  the  twenty  years'  term  has  expired,  will  such  population 
changes  as  may  have  taken  place  have  overmuch  to  say. 
It  is  a  vastly  dangerous  doctrine  to  assert,  even  on  the  supply 
side,  the  dependence  of  wages  either  on  the  standard  of  living 


452  THE  ECONOMICS  OF  ENTERPRISE 

or  un  the  supply  of  labor.  For  consumption  goods,  truly, 
the  reasoning  rightly  runs  that  an  increased  supply  diminishes 
price ;  but  for  production  goods  the  doctrine,  so  far  as  it 
is  applicable  at  all,  applies  differently  and  to  different 
results.  Whenever  the  very  increase  in  sui^ply  itself  implies 
and  necessitates  a  change  in  the  volume  of  demand,  the 
demand-and-supply  formula,  entirely  accurate  for  consump- 
tion goods,  becomes,  for  production  goods,  entirely  misleading 
unless  used  in  a  very  different  sense. 

If  the  labor  supply  increases,  how  can  any  one  know  that 
the  wages  must  fall  ?  Is  it  certain  that  either  the  per  capita 
productivity  by  weight  and  tale  or  the  per  capita  price  pro- 
ductivity must  suffer?  Not  unless  the  other  classes  and 
qualities  of  agents  have  failed  to  make  a  corresponding  in- 
crease. And  suppose  that  they  have  not ;  with  an  increased 
labor  supply  the  social  dividend  is  increased  ;  is  it  to  be  assumed 
that  only  the  old  total  of  wages  can,  under  the  new  aggregate 
productivity  of  labor,  be  distributed  among  laborers?  If 
labor  has  doubled  and  all  kinds  of  it  have  doubled,  but  if, 
at  the  same  time,  the  other  productive  factors  have  failed 
to  increase  or  to  increase  with  corresponding  rapidity,  it 
may  be  taken  as  true  that  not  quite  twice  as  great  an  aggre- 
gate of  social  product  will  be  possible ;  and  out  of  this  some- 
what smaller  per  capita  product  a  larger  relative  share  will 
go  to  the  agents  relatively  scarce,  and  a  somewhat  smaller 
relative  share  to  the  laborers.  And  this  is  all  there  can 
possibly  be  of  truth  in  the  proposition  that  "  the  wages  of 
labor  are  determined  by  an  equilibrium  of  forces  —  the  pro- 
ductivity of  labor,  on  the  one  hand,  creating  the  demand  for 
it,  and  the  standard  of  living  of  laborers,  on  the  other  hand, 
limiting  the  supply  of  it."      (See  Chap.  XIV.) 

To  put  it  another  way :  Since  with  the  change  in  the  supply  of 
labor  the  value  product  to  pay  with  is  all  the  while  changing,  that 
is,  the  productivaty  demand  is  changing,  the  effect  upon  the  wage 
level  must  sum  up  as  the  solution  of  two  inquiries:  (1)  in  what 
measure,  relatively  to  the  increase  of  labor,  is  there  a  resulting  in- 
crease in  the  total  product  to  be  distributed  ?  (2)  in  what  measure 
does  labor,  in  the  distributive  process,  fail  of  receiving  the  whole  of 
the  increase  of  product  resulting  from  the  labor  increase?     It  is 


LAW  OF  PROPORTIONS  453 

evident  that  an  appeal  to  the  ordinary  demand-and-supply  formula 
does  not  promise  great  results  for  the  purposes  of  this  problem. 

Classification  of  dynamic  modifications.  —  Limitations  of 
time  and  space  forbid  the  attempt  to  catalogue,  even  in  a 
general  way,  all  the  possible  combinations  of  productive 
factors,  and  to  analyze  the  changing  distributive  relations 
which  must  attend  these  different  combinations.  Some  of 
these  problems  have,  indeed,  been  covered  in  our  previous 
discussions  of  wages,  rents,  profits,  and  time  discounts. 
Not  much  more  can  be  done  than  to  present  a  possible  classi- 
fication of  those  directions  of  change  which,  as  modifications 
in  the  ultimate  conditions  under  which  production  and  dis- 
tribution take  place,  must  influence  the  respective  outcomes. 

Precisely  how  the  dynamic  facts  shall  be  classified  is, 
from  one  point  of  view,  perhaps  not  an  important  matter. 
Professor  Clark's  fivefold  division  into  changes,  (1)  in 
population,  (2)  in  capital,  (3)  in  industrial  methods,  (4)  in 
business  organizations,  (5)  in  human  wants,  is  possibly  as 
serviceable  as  any  other.  Making  some  effort,  however, 
toward  arriving  at  a  classification  more  nearly  approaching 
the  ultimate,  we  shall,  perhaps,  settle  upon  something  like 
the  following  :  modifications  (1)  in  humanity,  (2)  in  environ- 
ment. Under  modifications  in  humanity  are  to  be  catalogued 
the  following  lines  of  change : 

(a)  in  numbers. 

I  changes  in  aggregate  wants, 
changes  in  relative  intensity, 
changes  in  kind  and  direction. 

I  changes  in  industriousness  or  strength, 
changes  in  technique, 
changes  in  organization. 


Under  modifications  in  environment : 
(a)   In  land     . 
(6)  non-land  changes,  capital  goods 


changes  in  the  sources  of  food  supply, 
changes  in  the  sources  of  raw  materials 
of  industry. 


454  THE  ECONOMICS  OF  ENTERPRISE 


(c)  changes  in  loan 
fund  and  in  prop- 
erty institutions 


from  the  point  of  view  of  each  entrepre- 
neur an  objective,  environmental  fact ; 
from  the  social  point  of  view  merely 
relations  among  men  ;  perhaps  prop- 
erly to  fall  under  "modifications  in 
humanity." 


But  here  again  the  question  presents  itself  as  to  what  pur- 
pose, other  than  schematic,  this  classification  may  be  made 
to  serve ;  but  if  for  nothing  further,  it  will,  at  any  rate, 
afford  a  convenient  guide  for  purposes  of  exposition. 

Task  hopeless  in  magnitude  and  complexity.  —  Doubtless 
it  is  possible  to  make  some  broad  generalizations  with  regard 
to  the  effects  of  increasing  population  upon  land  values 
and  upon  land  rents  in  the  aggregate,  irrespective  of  whether 
all  lands  must  equally  share  in  these  effects.  Possibly,  also, 
though  less  securely,  something  might,  in  wide  generalization, 
be  said  of  the  effects  of  increasing  machinery  upon  rents  or 
upon  wages,  all  this,  likewise,  without  attempt  to  distribute 
labor  into  different  sorts  and  grades  in  its  technological 
relations  to  machinery. 

But  the  difficulty  with  all  this  is  that  all  of  it  has  its  basis 
in  the  technological  relation  of  different  instruments  and 
agents  to  one  another,  and  that  these  technological  relations 
will  not  classify  in  even  a  loose  and  general  coincidence  with 
the  traditional  threefold  classification  of  productive  factors. 

Changes  in  industrial  methods.  —  Something,  however, 
must  be  said  as  to  the  effects  of  changing  technique.  The 
traditional  threefold  classification  is  especially  disastrous 
here.  Hygiene  may  render  pill-rolling  machinery  useless ; 
invention  may  largely  displace  both  labor  and  instrumental 
goods,  and  may  shift  the  emphasis  over  upon  land  generally 
or  upon  particular  kinds  and  qualities  of  land.  There  is,  in 
truth,  no  limit  to  the  possible  and  the  probable  permutations 
here ;  here,  indeed,  it  is  always  the  unexpected  that  is  probable. 
How  complicated  these  problems  are,  and  how  dependent 
for  their  solution  upon  assumptions  tacitly  made  or  un- 
consciously implied,  may  be  seen  in  an  analysis  of  the  re- 
lations of  improvements  in  transportation  and  in  crop-raising 
technique  to  the  rental  values  of  land. 


LAW  OF  PROPORTIONS  455 

But  all  this  detail  grows  wearisome,  simply  because  there 
can  never  come  any  end  to  it ;  at  the  best,  it  is  mostly  a 
disciplinary  gymnastic.  But  this  much,  at  least,  stands 
forth  clearly  :  Every  problem  in  the  dynamics  of  value,  in  its 
distributive  aspect,  must  seek  its  solution  along  two  lines 
of  inquiry:  (1)  How  does  the  new  development  affect  the 
social  dividend  ?  (2)  Does  the  new  development  tend,  as 
complementary  good  or  process,  to  make  relatively  greater 
the  demand  for  the  instrument  or  agent  under  examination  ? 
or,  rather,  is  the  relation  one  of  substitutionary  good  or 
process  —  amounting,  that  is,  to  an  increase  in  the  supply  of 
the  goods  under  examination  ?  ^ 

1  Elasticity  of  Consumption:   Land  Rent. 

Space  and  air  and  food  are  the  prime  necessaries  of  life.  But  it 
is  only  food  that  has  to  be  paid  for  in  order  to  have  it  in  the  req- 
uisite measure.  The  utility  of  the  first  unit  of  good  is  infinite,  or 
nearly  so.  But  the  utility  curve  falls  sharply ;  it  is  easy  to  have 
more  than  enough ;  our  want  is  limited.  And  with  this  sharply 
falling  curve  of  utility,  there  go  sharply  falling  price-demand 
curves,  individual  and  aggregate.  This  steepness  of  curve  is  only 
another  way  of  asserting  that  fabulously  high  prices  must  attend 
any  great  shortage  in  the  aggregate  food  supply,  and  that  a  great 
fall  in  price  must  follow  upon  a  world-wide  bountiful  harvest. 
With  a  short  supply  of  any  commodity,  the  price  must  go  high 
enough  to  shut  out  all  purchasers  not  able  and  willing  to  pay  gen- 
erous prices  ;  with  a  generous  supply,  the  price  must  go  low  enough 
to  find  purchasers  for  all  of  the  supply.  But  with  some  commodi- 
ties a  small  fall  in  price  will  uncover  a  widely  e.xtended  market ; 
these  are  the  commodities  whose  consumption  is  said  to  be  elastic. 
With  these  commodities  also  rising  prices  rapidly  retire  the  demand. 

But  with  other  things,  and  with  food  especially,  the  consuming 
disposition  responds  ungenerously  to  falling  prices,  while  at  the 
same  time  it  is  not  greatly  affected  by  rising  prices.  These  are  the 
commodities  of  inelastic  consumption  —  the  commodities  of  steep 
demand  curve. 

With  commodities,  then,  of  marked  inelasticity  of  consumption, 
prices  fall  more  rapidly  than  the  supply  increases,  and  rise  more 
rapidly  than  the  supply  diminishes.  With  food  products  espe- 
cially, the  rise  of  prices  is  out  of  proportion  to  the  decrease  in  supply 
and  the  fall  out  of  proportion  to  the  increase. 

The  relations  of  improving  agricultural  technique  and  of  cheap- 
ening transportation  to  the  rents  of  agricultural  lands  are  to  be 
analyzed  only  in  the  light  of  the  inelasticity  in  the  consumption  of 


456  THE  ECONOMICS  OF  ENTERPRISE 

agricultural  products.  The  traditional  analysis  has  assumed  a 
practically  inelastic  consumption  and  has  deduced  the  conclusion 
that  the  olt'oct  of  any  of  these  improvements  must  be  a  reduction  in 
the  world  total  of  agricultural  rents.  Nor,  with  the  assumption 
accepted,  is  the  conclusion  to  be  avoided.  An  improvement  in 
technique  is  equivalent  to  an  increase  in  the  fertility  of  land  or  in 
the  supply  of  it.  It  is  so  far  a  mitigation  of  the  land  famine ;  it 
n\ight  conceivably  go  so  far  as  to  cancel  all  fertility  rents.  Cost- 
less transportation  also  would  cancel  position  rents. 

But  so  soon  as  the  elasticity  —  or  the  inelasticity  —  is  taken  to 
be  one  of  degree,  the  doubts  multiply.  To  arrive  at  definite  con- 
clusions the  extent  of  the  inelasticity  must  be  known. 

Gregory  King's  Law  —  formulated  a  couple  of  centuries  ago  — 
was  the  first  attempt,  as  it  may  long  remain  the  last,  to  mask  our 
unprecise  knowledge  of  the  facts  in  the  appearance  of  scientific 
accuracy.  The  pronouncement  was  to  the  effect  that  if  the  crop  of 
any  one  j'ear  were  only  90  per  cent  of  the  ordinary  crop,  the  prices 
would  rise  by  30  per  cent  —  the  aggregate  selling  price,  therefore, 
by  17  per  cent.  The  short  crop  outsells  the  normal  crop.  So  with 
80  per  cent  of  crop  the  prices  would  rise  by  80  per  cent,  and  the 
aggregate  selling  price  by  44  per  cent. 

With  70  per  cent  of  crop  ....  2.60  of  price,  and  1.82  total  price 
With  60  per  cent  of  crop  ....  3.80  of  price,  and  2.28  total  price 
With  50  per  cent  of  crop  ....  5.50  of  price,  and  2.75  total  price 

Just  how  Gregory  King  found  out  all  this,  we  may  not  too  curi- 
ously inquire.  The  figures  appear,  indeed,  to  be  an  understate- 
ment of  the  truth  if  taken  to  apply  to  the  aggregate  food  product 
of  the  world  —  probably  as  seriously  an  overstatement  if  formu- 
lated for  any  one  country  or  for  any  one  variety  of  product.  In 
Gregory  King's  time,  the  world  was  not  one  market. 

Assuming,  however,  the  substantial  accuracy  of  the  estimates 
as  matter  of  the  world  supply  and  the  world  demand,  it  is  a  valid 
inference  that  rents  in  the  aggregate  must  fall  with  every  influence 
working  for  larger  supplies  of  food  products.  If  one  acre  can  be 
made  to  produce  what  two  acres  were  producing  before,  much 
land  will  be  thrown  out  of  cultivation,  prices  sharply  fall,  and  the 
price  differential  between  the  better  land  and  the  poorer  —  and 
between  the  best  land  and  the  poorest  —  be  narrowed.  Obviously 
this  must  be  true  if  only  the  fall  in  prices  be  sharp  enough.  And, 
clearlj',  on  the  assumption  made,  the  back-to-the-land  movement, 
in  any  large  and  general  way,  is  an  impossibility. 

From  the  same  assumption,  the  same  conclusions  must  follow  for 
the  opening  up  of  new  lands  through  extending  and  cheapening 
transportation.  Prices  will  fall  faster  than  the  product  increases. 
The  rents  must  fall  stiU  more  rapidly. 


LAW  OF  PROPORTIONS  457 

But  even  so,  the  analysis  is  valid  only  for  the  short-time  tend- 
ency and  for  the  case  of  a  sharp  divergence  between  the  supplies 
of  any  particular  year  and  the  established  standards  of  consump- 
tion. The  same  conclusions  will  not  hold  for  periods  long  enough 
for  changes  to  occur  in  the  habits  of  consumption. 

It  is  probably  true  that  habits  of  diet  can  modify  only  very 
slightly  the  total  of  nutriment  that  the  individual  can  digest  and 
assimilate.  With  centuries  of  adaptation  and  of  selection  (selec- 
tive adaptation),  physical  efficiency  may  come  to  be  consistent 
with  a  somewhat  more  meager  diet.  But  it  is  not  easily  credible 
that  an  increasingly  generous  diet  can  be  assimilated  in  a  degree 
to  be  of  great  importance  to  the  discussion. 

But  the  long-time  elasticity  of  consumption  is  mostly  of  another 
sort,  the  modification  taking  place  not  in  the  amount  of  nutriment 
consumed,  but  in  the  relative  amounts  of  the  different  varieties 
consumed,  or  in  the  addition  of  new  varieties.  Doubtless  the  per 
capita  consumption  of  the  cheaper  food  products  does  somewhat 
increase  from  hard  times  to  good  ;  the  dinner  pail  that  is  relatively 
full  is  a  reality.  But  in  the  main  —  and  especially  in  the  long-time 
tendency  —  elasticity  manifests  itself  mostly  in  the  substitution  of 
more  expensive  products  for  the  less  expensive  —  of  wheat  for 
corn  or  rye,  bread  for  potatoes,  meat  for  cereals,  fruit  for  vege- 
tables, wine  for  cider,  champagne  for  wine,  and  generally  in  the 
addition  of  new  luxuries,  new  delicacies,  new  tastes,  and  new 
flavors.  Eating  and  drinking  what  the  men  of  to-day  actually 
eat  and  drink,  it  may  take  more  acres  of  land  to  support  the  human 
being  of  to-day  than  were  required  a  hundred  years  ago  for  his 
predecessor. 

The  statistics,  therefore,  that  go  to  show  that  the  per  capita 
consumption  of  corn  has  appreciably  augmented  with  the  past  15  or 
20  years  should  probably  be  interpreted  to  mean  not  that  more 
corn  is  actually  consumed  as  such,  but  rather  in  some  derivative 
form  like  meats  or  sirup  or  starch  or  breakfast  foods.  Similarly, 
also,  with  wheat,  though  probably  not  in  the  same  degree. 

But  whatever  these  statistics  precisely  mean,  they  at  least  suffice 
to  discredit  the  long-accepted  legend  of  practical  inelasticity.  The 
Government  Crop  Reporter  of  April,  1912,  affirms  "that  in  the 
last  10  or  15  years  substantial  increases  in  the  prices  of  agricultural 
products  have  occurred  in  every  important  country  in  the  world. 
.  .  .  Coincident  with  this  upward  trend  of  prices,  the  world's 
production  .  .  .  has  also  been  increasing  and  at  a  rate  faster  than 
the  increase  of  population.  The  world's  per  capita  consumption 
of  agricultural  products  in  the  last  few  years  has  probably  been 
larger  than  at  any  previous  period.   .  .   . 

"Wheat.  ...  In  10  years  there  has  been  an  average  increase 
in  the  yield  per  acre  of  about  8  per  cent  and  an  expansion  in  area  of 
about  15  per  cent.  .  .  . 


458  THE  ECONOMICS  OF  ENTERPRISE 

"Corn.  ...  Tn  Iho  fivo-yoar  period  1895-1899  .  .  .  the  crop  was 
about  2,7")«).()0l),(HK)  bushels;  in  the  next  five  years,  2,9()5,00(),0(K); 
in  (he  last  live  years,  3,543,000,000;  ...  an  average  increase  of 
nearly  2.S  per  cent  ...  a  year.  .  .  .  From  1895-1899  to  1905- 
1909  the  oat  production  had  increased  27  per  cent  .  .  .  barley  38 
per  cent  .   .   .  rye  7  per  cent  .  .   .  five  cereals  ...  25  per  cent. 

"  Animal  products.  .  .  .     The  world's  supply  in 

1905  1910 

cattle  403,958,000  448,796,000 

sheep  544,382,000  605,333,000 

swine  137,260,000  137,846,000 

"...  Such  figures  indicate  that  the  aggregate  suppl  J' of  animal 
products  .  .  .  has  kept  pace  with  population  during  the  past 
decade." 

Noting  the  fact  that  food  products  have  increased  faster  than 
population,  and  that  the  rise  in  prices  of  the  past  15  years  has  been 
especially  marked  in  food  products,  it  is  clear  that  the  inelasticity 
in  food  consumption  has  been  greatly  exaggerated.  Relative  in- 
elasticity there  doubtless  is,  but  still  an  appreciable  degree  of 
elasticity  in  the  absolute. 

It  is,  then,  safe  to  conclude  that  agricultural  rents  cannot  greatly 
rise  with  the  advance  of  technique  in  agriculture  and  transporta- 
tion, but  that,  on  the  other  hand,  the  fall,  if  there  is  any  fall,  must 
be  inconsiderable. 

With  urban  rents,  however,  the  tendency  is  quite  other.  (See 
Chap.  XIII.) 

But  in  any  case  the  conclusion  is  inevitable  that  improving  tech- 
nique in  transportation  and  increasing  supplies  of  equipment  have 
much  the  same  effect  on  land  rents  and  on  the  prices  of  agricultural 
products  as  would  attend  an  increase  in  the  supply  of  land.  The 
point  of  especial  theoretical  significance  here  is  that  no  one  can 
know  accurately  whether,  on  the  whole,  the  relation  of  freight  cars 
to  land  is  a  complementary  relation  or  a  relation  of  substitution. 
If,  then,  classification  be  made  to  depend  on  technological  relations, 
and  only  that  be  called  land  which  competes  with  land,  and  only 
those  intruments  called  capital,  as  distinguished  from  land,  that 
are  complementary  to  land  and  that  tend  to  make  land  relatively 
scarce,  no  one  can  now  know,  or  is  certain  ever  to  know,  whether  to 
call  a  freight  car  land  or  capital. 


CHAPTER   XXV 

COSTS    IN    CORPORATE    AND    LARGE    BUSINESSES 

New  industrial  organization.  —  An  earlier  chapter  (VI) 
has  discussed  the  cost  computation  of  an  entrepreneur  en- 
gaged in  a  typically  small  and  relatively  simple  business, 
like  that  of  the  farmer  or  the  retail  merchant.  But  how  far 
is  this  analysis  appropriate  to  the  affairs  of  the  giant  in- 
dustrial plant.  In  what  degree  does  the  traditional  en- 
trepreneur analysis  apply  to  the  corporate  organization? 
How,  for  example,  does  the  cost  analysis  present  itself  to  the 
International  Harvester  Company?  More  and  more  is 
business  assuming  the  corporate  organization.  And  more 
and  more,  also,  it  might  be  added,  is  the  corporate  organiza- 
tion tending  in  the  direction  of  monopoly.  But  monopoly  is 
not  directly  a  part  of  the  present  problem.  (See  Chap. 
XXXI.) 

Corporate  versus  individual  cost.  —  On  the  face  of  it,  the 
cost  problem  as  presented  to  the  corporation  would  appear 
to  call  for  no  very  serious  modification  of  the  preceding 
analysis.  True,  the  managers  of  corporations  are  them- 
selves salaried  men,  receiving  wages  from  their  employers, 
the  corporations,  rather  than  deriving  profits  from  their 
individual  activity.  Thus,  corporate  managerial  activity 
—  in  the  profit-receiving  sense  —  dwindles  to  a  minimum. 
But  we  have  already  seen  that  wages  and  profits  are  received 
under  the  same  title  of  reward  for  personnel  activity,  and 
that  the  distinction  is,  for  many  purposes,  not  of  great  im- 
portance. And  some  remnant  of  the  profit  which  the  stock- 
holders receive  is  doubtless  compensation  for  their  supervision 
of  the  enterprise.  They  have  ultimate  legal  authority,  and 
recurrently  in  legal  contemplation  —  and  sometimes  in 
actual  fact  —  select  the  personnel  of  the  management  and 
determine  the  policies  of  the   business.     With   the  stock- 

459 


460  THE  ECONOMICS  OF  ENTERPRISE 

holders  is  the  risk  of  loss,  as  also  is  the  hope  of  dividends ; 
all  of  their  ownership  interests  center,  indeed,  in  the  dividend  : 
they  are  investors  looking  for  returns  upon  their  invested 
funds.  The  officers  are  merely  the  appointed  agents  or 
stewards.  Included  in  dividends,  therefore,  is  some  frac- 
tion of  true  profits  —  the  rewards  of  an  attenuated  discre- 
tion and  direction  in  the  selection  of  the  investment  to  be 
enter(>d  into  and  in  the  choice  of  the  employees  to  have 
charge  of  it.  The  stockholders  are,  in  substance,  joint  entre- 
preneurs. In  fact,  there  are  in  the  entrepreneur  function  a 
variety  of  activities.  Some  of  these  are  more  detailed  and 
more  clerical  in  nature  than  others,  but  all  are  personal 
activities  and  are  remunerated  as  such.  That  a  part,  the  less 
responsible  part,  are  delegated  to  selected  employees,  leaves  the 
residuum  of  remuneration  none  the  less  a  remuneration  for 
personal  activity,  a  wage  impersonally  received  from  the 
market  without  the  intervention  of  an  employer.  The 
dividends  are,  then,  in  part,  true  interest ;  in  part,  higher 
gains  received  because  of  the  danger  of  smaller  dividends  or 
of  loss  of  the  principal ;  in  part,  gains  on  risk  in  excess  of  the 
cost  of  carrying  the  risk ;  and  in  part,  albeit  a  small  part, 
a  reward  for  the  entrepreneur  function  of  ultimate  choice 
and  supervision. 

But  no  matter  how  strong  is  the  case  for  regarding  the 
stockholders  as  entrepreneurs,  it  still  stands  as  true  that 
the  business  of  the  corporation  is  to  make  dividends  and  that 
these  are  in  the  main  a  return  upon  invested  funds,  a  return 
which  is  to  be  apportioned  ratably  among  the  stockholders 
according  to  the  size  of  their  holdings.  The  corporate  quest, 
like  other  quests,  is  for  the  largest  possible  net  return  upon 
the  business.  Gain  solely  is  in  contemplation ;  but  these 
gains  are  in  no  appreciable  measure  conceived  as  profits 
in  the  technical  sense  of  returns  for  gainful  activity,  but 
rather  as  interest  upon  invested  capital. 

Profits  on  stock  operations.  —  Surely  in  many  cases  the  owners 
of  the  stocks  do  reap  true  profits.  But  these  occur,  not  in  the  course 
of  the  conduct  of  the  corporate  affairs,  but  in  investing  or  dealing 
in  the  corporate  stocks.  If,  for  example,  the  aggregate  stock  invest- 
ment of  1,000,000  dollars  turns  out  to  reap  returns  of  10  per  cent 


COSTS  IN  LARGE  BUSINESSES  461 

upon  the  investment  —  and  to  promise  as  well  for  the  future  —  the 
stocks  will  register  a  market  price  of  approximately  2,000,000  dollars 
instead  of  par.  This  means  that  the  property  which  cost  1,000,000 
is  worth  2,000,000 ;  it  really  pays  5  per  cent  on  the  new  valuation, 
not  10  per  cent  on  the  old.  There  has,  then,  already  accrued  a 
profit  of  1,000,000  dollars,  expressed  as  an  1,000,000  dollars  increase 
in  the  market  value  of  the  property.  Certainly  a  part  of  this  in- 
crease is  accurately  to  be  regarded  as  an  indemnity  for  risks  under- 
taken and  part  as  a  return  upon  personal  cleverness  or  wisdom. 
Room  here  for  profits  in  the  strict  sense  there  surely  is.  The  only 
question  is  what  part  is  to  be  attributed  to  each  function,  what  part 
interest,  what  part  profit. 

But  this  profit  evidently  does  not  accrue  in  the  regular  conduct  of 
corporate  affairs,  but  is  rather  a  gain  to  one  who  is  operating  in  the 
stocks  of  the  corporation  —  an  external  matter  rather  than  an  internal. 
The  business  of  the  corporation  is  the  carrying  on  of  the  corporate 
business.  The  affairs  of  any  individual  stockholder  are  another 
matter.  In  the  corporate  business  there  is,  then,  small  place  for 
profits  in  the  strict  and  technical  sense. 

Profits  of  corporation  versus  profits  of  managers.  —  But  even 
admitting  that  corporate  profits  may  accrue  in  the  most  limited  and 
technical  sense  of  the  word,  they  concern  the  case  only  as  material 
for  dividends,  the  ultimate  purpose  of  the  corporation. 

And  precisely  as  a  distinction  is  necessary  between  the  business  of 
a  corporation  and  the  possible  operations  of  the  individual  owners  of 
its  stocks,  so  another  distinction  must  be  drawn  between  the  opera- 
tions of  the  corporation  and  the  possible,  and  probable,  operations 
of  the  management.  Profits  are  easily  possible  for  the  managers  by 
ways  not  strictly  interior  to  the  corporation  or  logically  a  part  of  its 
processes.  It  is  not  uncommon  for  the  managers  to  reap  a  purely 
personal  reward  for  a  personal  activity  which  is  a  mere  plundering 
of  the  corporation  whose  interests  they  are  appointed  to  serve.  They 
may,  for  example,  vote  themselves  prodigal  salaries,  especially  if  they 
have  the  strategic  advantage  of  owning  or  controlling  considerable 
amounts  of  stock.  Or  they  may  in  one  way  or  another  directly  ap- 
propriate the  corporate  money  without  waiting  to  have  it  voted. 
Methods  of  this  sort  are,  however,  too  crude  for  the  really  finished 
and  artistic  operators  in  corporate  mismanagement.  Nor  do  the 
higher  levels  of  good  form  and  of  clever  workmanship  now  permit 
the  adept  to  own  industries  along  the  line  of  the  railroad  and  to 
make  himself  especially  favorable  freight  rates,  or  to  sell  to  the 
corporation  his  own  product  at  especially  high  prices,  or  to  buy  from 
the  corporation  his  supplies  at  special  concessions,  or  to  deny  to  his 


462  THE  ECONOMICS  OF  ENTERPRISE 

competitor  the  privilege  of  sidetracks  or  the  use  of  freight  cars. 
Doubtless  all  these  different  iniquities  are  practiced,  but  they  dis- 
credit the  corporation  manager  as  a  bungler  and  a  novice.  He  is 
now  a  vulgar  fellow  wlio  stoops  to  mere  commonplace  and  obvious 
stealing.  No  matter  what  may  still  remain  his  standing  in  polite 
society,  the  code  of  reputable  business  has  ceased  to  tolerate  him. 
His  methods  are  not  refined  enough  to  comply  with  the  later  stand- 
ards of  high  finance.  They  are  no  better  than  pilfering  from  the 
till,  or  plundering  one's  chief,  or  betraying  a  specific  trust,  or  selling 
out  a  chent,  or  defrauding  a  ward.  All  these  things  the  business 
code  of  morals  now  outlaws. 

Many  things,  however,  the  corporate  manager  may  still  do  without 
offense  to  the  established  code.  Here,  again,  the  distinction  between 
the  corporation  and  the  stockholder  is  important.  Decency  denies 
the  manager  pemiission  to  plunder  his  corporation,  but  he  has  not 
yet  been  deprived  of  the  privilege  of  plundering  both  present  and 
prospective  stockliolders  by  bu\ang  stocks  from  the  one  and  selling 
them  to  the  other.  Nothing,  indeed,  could  be  easier  or  simpler : 
The  manager  has  only  to  utiUze  his  inside  information  for  purposes 
of  operations  in  the  stock  markets,  buying  from  existing  holders 
when  the  stocks  are  seen  to  be  unduly  low  and  selling  when  the 
stocks  are  overhigh.  Or  better  yet :  If  the  company  has  so  pros- 
pered as  to  earn  good  dividends  and  as  to  register  a  high  value  for  its 
stocks,  the  next  step  is  to  mismanage  it  and  to  sell  stocks,  or  to  sell 
futures  in  stocks,  and  then  to  mismanage  —  a  reaping  of  gains  so 
easy  and  so  certain  as  hardly  to  merit  the  name  of  speculation.  Or, 
again,  if  the  business  has  been  mismanaged,  an  equally  generous  gain 
may  be  had  by  "  going  long  "  in  the  market  and  managing  the 
property  well.  Or  the  management  —  e.g.,  Mr.  Harriman  and  his 
friends  in  the  Union  Pacific  —  may  determine  to  raise  the  dividends 
from  8  to  10  per  cent.  Pending  this,  they  maj^  buy  heavily  from 
the  existing  stockholders  to  the  end  of  selling  later  at  from  20  to  40 
points  of  profit.  And  thereafter,  say  a  year  or  two  later,  it  will  be 
time  enough  to  discover  that  10  per  cent  was  too  high  a  dividend 
for  the  business  to  stand  —  whereupon  another  equally  large  total  of 
plunder  may  be  had  by  speculating  for  the  fall  in  stocks,  which  may 
be  relied  upon  promptly  to  follow  the  announcement  of  the  lower 
dividend.  There  is,  indeed,  no  good  reason  why  a  very  wealthy 
individual  or  group  of  individuals  may  not,  in  the  multiplicity  of 
great  corporate  undertakings,  have  always  in  process  one,  or  two,  or 
several  of  these  safe  and  gainful  manipulations.  And  after  each 
campaign  the  next  will  be  easier;  with  the  proceeds  still  more 
may  be  financed. 


COSTS  IN  LARGE  BUSINESSES  463 

But  assuming  for  the  moment  that  the  management  is 
seriously  trying  to  earn  the  maximum  possible  dividend  — 
an  assumption  which  equally  may  or  may  not  be  valid  — 
it  is  to  be  noted  that  none  of  these  stock  exchange  operations 
have  rightly  to  do  with  the  computations  by  which  the  cor- 
poration arrives  at  its  costs  and  determines  its  output  either 
of  commodities  or  of  services.  The  gains  are  not  to  be  re- 
garded as  profits  as  the  result  of  the  activities  of  the  cor- 
poration proper,  but  as  the  collateral  diversions  of  the 
managers. 

Monopoly  and  cost.  —  The  necessities  of  the  present  analysis  com- 
pel immediate  reference  to  reasonings  belonging  in  strictness  to 
monoply  theory : 

It  is  commonly  said  that  the  theory  of  monopoly  price 
diverges  from  competitive  theory  by  the  very  fact  that,  in 
monopoly  production,  cost  is  not  appealed  to  as  the  explanation  for 
the  volume  of  supply,  —  that  cost  bears  upon  price  only  as  it  bears 
upon  the  supply  side  of  the  market  equation,  —  that  the  peculiar 
advantage  of  monopoly  is  that  it  may  fix  the  supply  where  it  will, 
and  that  the  monopoly  control  over  price  rests  solely  in  the  power  of 
determining  the  supply. 

Such  is,  indeed,  the  truth  of  the  case.  The  theory  of  monopoly 
is  simple,  when  once  the  competitive  analysis  has  been  made  clear. 
It  is,  however,  possible  to  reduce  the  computation  by  which  a  monop- 
oly fixes  supply  to  the  terms  of  the  cost  analysis.  Assume  for 
illustration  that,  as  a  matter  of  the  providing  of  a  plant  and  of  the 
other  necessary  burdens  of  production,  a  monopoly  can  afford  to 
place  upon  the  market  anywhere  from  50  to  100  units  of  product  at 
an  expense  of  50  each ;  and  assume  that  the  demand  is  such  that  one 
unit  could  be  sold  at  100,  2  at  99,  and  so  on  down.  Evidently,  the 
maximum  gain  for  the  monopoly  is  found  in  selling  25  units  at  a  price 
of  75,  and  at  a  gain  of  25  per  unit ;  25  X  25  is  the  largest  parallelo- 
gram to  be  plotted  inside  of  the  triangle ;  26  units  at  24  of  gain,  or 

24  units  at  26  of  gain,  would  give  a  total  gain  of  624 ;  25  units  at 

25  of  gain  gives  a  total  of  625. 

With  changes  in  either  the  curve  of  supply  or  the  curve  of  de- 
mand, changes  must  come  in  the  point  at  which  a  restriction  of 
product  will  return  the  maximum  gain.  A  deal  of  experimenting 
may  be  necessary  in  practical  affairs  in  order  to  develop  the  facts  as 
to  demand  or  as  to  supply.  But  the  general  principle  is  clear. 
And  the  possibility  of  stimulating  competition  or  of  arousing  public 


464  THE  ECONOMICS  OF  ENTERPRISE 

agitation  or  adverse  legislation  may  doubtless  advise  the  nionopolj', 
as  a  long-time  policy,  to  impose  exactions  something  short  of  the 
maximum  possibility.  And  if,  as  is  commonly  the  case,  a  monopoly 
is  only  partial  instead  of  complete,  there  arises  the  question  of  how 
effectively  to  limit  the  aggregate  product  and  to  arrive  at  a  working 
apportionment  of  it. 

But  in  any  case,  the  cost  analj^sis  may  without  undue  violence  be 
extended  to  cover  the  problem.  At  its  broadest,  the  cost  law  indi- 
cates the  point  at  which  product,  or  added  product,  cancels  as  many 
price-measured  facts  as  it  adds  to  the  aggregate  selhng  price ;  pro- 
duction ceases  at  the  point  at  which  price  costs  are  at  balance  against 
price  product.  The  monopol}^  application  of  this  principle  is  as 
follows :  On  the  credit  side  of  the  account  is  computed  the  incre- 
ment of  product  at  the  new  sale  price  which  attends  its  production  ; 
to  be  charged  against  this  total  addition  of  selling  price  are  (1)  the 
extra  outlays  of  production,  and  (2)  the  loss  in  price  suffered  by  the 
earUer  items  of  product  through  the  addition  of  the  new  items.  The 
point  of  equation  between  the  two  sides  of  the  account  is  the  hmit 
upon  production. 

In  actual  fact,  however,  restrictions  of  product  rarely  follow  the 
method  of  first  determining  the  volume  of  product  and  then  of  leav- 
ing it  to  the  market  to  absorb  this  product  on  such  terms  as  may  be 
fixed  by  the  competition  of  buyers.  The  more  common  method  is 
to  fix  the  selling  price  and  then  to  sell  only  such  product  as  the  mar- 
ket will  accept  at  the  price.  But  it  still  holds  true  that  the  higher 
price  is  possible  only  on  terms  of  the  restriction  of  product.  By  this 
method  of  limiting  the  product  at  the  amount  which  will  be  taken  at 
the  price,  the  adjustments  necessary  under  partial  monopoly  are 
more  readily  made.  The  producer  controlling  a  very  large  propor- 
tion of  the  total  productive  capacity  may  commonly  dictate  the 
price  at  any  given  time.  The  smaller  competitors  find  it  better 
worth  their  while  to  adhere  to  this  price  than  to  precipitate  a 
struggle  for  larger  sales  through  a  price-cutting  competition. 

Characteristics  of  giant  industries.  —  Irrespective  of  any 
monopoly  features,  the  conditions  under  which  the  great 
industrial  undertakings  are  carried  on  are  in  sharp  contrast 
to  those  of  farming  or  of  any  other  tj^pically  simple  line  of 
production : 

(1)  The  farm  may  be  used  for  any  one  of  many  different 
products,   in    case    any   particular    product    brings    disap- 


COSTS  IN  LARGE  BUSINESSES  465 

pointing  returns.  In  fact,  that  the  returns  from  any  partic- 
ular product  are  unsatisfactory  is  likely  to  be  due  to  the 
more  flattering  prospects  offered  by  some  other  product. 

The  railroad  or  the  rolling  mill,  on  the  contrary,  is  adapted 
only  to  a  relatively  specialized  line  of  production. 

(2)  Farming  is  easily  entered  into  and  easily  abandoned. 
There  are  always  men  looking  for  farms  to  hire  or  to  buy ; 
the  farmer's  implements  and  stock  are  easily  salable  to  other 
cultivators  or  upon  the  general  market. 

But  the  giant  business  with  its  extensive  and  specialized 
plant  cannot  well  withdraw.  It  has  commonly  no  one  to 
sell  to.  The  plant  is  good  for  little  else  than  its  original 
purpose.  The  railroad  cannot  cease  to  be  a  railroad  or  the 
rolling  mill  a  rolling  mill.  The  only  thing,  or  the  least  dis- 
astrous thing,  is  to  go  ahead,  even  though  no  dividends 
accrue  to  the  stock  and  little  interest  to  the  bonds.  The 
nature  of  the  service,  to  say  nothing  of  the  heavy  fixed  charges, 
makes  even  a  temporary  suspension  an  impossibility  or  a  dire 
calamity.  Insolvency  means  merely  that  the  bondholders 
take  the  property,  to  run  it  for  the  same  purposes  and  under 
much  the  same  conditions.  Such  cost  computations,  there- 
fore, as  really  parallel  the  simpler  cases  in  the  preceding 
chapter  are  forward-looking  computations  applicable  only 
to  a  specialized  plant.  Cost,  as  the  necessary  indemnity 
for  the  bringing  forth  of  supply,  is  cost  as  an  inducement  to 
begin  rather  than  as  indemnity  to  continue,  and  is  a  long-time 
and  slow-moving  force  in  working  itself  out  into  modifi- 
cations of  the  supply.  Doubtless  this  forward-looking 
computation  is  actually  made,  but  it  contemplates  a  long- 
time average  of  market  conditions,  and  has  small  bearing 
on  the  policy  of  any  particular  season  or  year.  There  is,  of 
course,  always  some  flexibility  of  policy  with  regard  to  wear- 
out  and  up-keep,  but  even  here  the  choice  has  narrow  limits. 
It  is  commonly  better  to  keep  up  the  property  —  in  some 
more  or  less  adequate  fashion  —  than  to  abandon  it  entirely. 
Thus,  the  lower  limit  of  selling  price  is  close  to  the  operating 
charges  for  labor  and  raw  materials,  plus  the  most  urgent  of 
up-keep  costs. 

(3)  The  individual  farmer  supplies  only  an  infinitesimal 


466  THE  ECONOMICS  OF  ENTERPRISE 

share  of  goods  which  have  almost  a  world  market,  and  for 
any  particular  kind  of  crop  faces  what  is,  for  him,  an  in- 
definitely eln.stic  consumption.  Not  so  with  most  of  the 
giant  businesses.  With  the  railroad,  for  example,  no  great 
modification  can  be  wrought  in  the  supply  of  services  which 
can  find  a  market.  Changes  in  the  rates  imposed  will  only 
slowly  develop  a  larger  traffic.  For  any  short-time  compu- 
tation, the  volume  of  traffic  to  be  moved  or  of  passengers  to 
be  served  is  not  greatly  subject  to  change ;  about  so  much 
business  can  be  done  and  not  much  more,  no  matter  what 
may  be  the  rate.  The  ultimate  determinant  in  the  case  is 
the  size  of  the  population  and  its  industrial  efficiency.  Thus, 
modifications  in  the  demand  for  services  and  in  the  equip- 
ment to  supply  this  demand  do  not  readily  take  place  and 
arrive  tardily,  if  at  all. 

And  even  when  the  particular  plant  is  not  tied  to  a  certain 
area  of  traffic,  the  weight  of  the  goods  and  the  expense  of 
distant  marketing,  or  the  defensive  price  making  of  com- 
petitors may  greatly  restrict  the  practicable  area  of  operation. 
Or  the  product  may  be  one  in  which  the  fluctuations  in 
demand  are  not  marked  and  in  which  the  aggregate  of 
consumption  responds  slightly  or  slowly  to  concessions  in 
price. 

(4)  Farming  does  not  lend  itself  readily  to  the  giant  or- 
ganization. The  farmer  may,  it  is  true,  advantageously 
handle  more  land  than  his  own  labor  will  call  for,  but  the 
limit  of  practicable  size  is  never  remote.  The  right  pro- 
portion between  entrepreneur  and  land  requires  that  each 
farmer  confine  himself  to  a  necessarily  restricted  area.  Thus, 
not  only  for  farming  in  the  aggregate,  but  for  each  individual 
cultivator,  higher  prices  mean  a  more  intensive  cultivation  at 
a  constantly  rising  margin  of  cost. 

But  in  the  industries  susceptible  of  the  giant  organization, 
and  especially  in  the  industries  requiring  a  relatively  heavy 
investment  in  specialized  equipment,  the  wider  the  market 
and  the  larger  the  output  of  any  one  competitor,  the  lower 
may  fall  the  cost  of  production  per  unit  of  product,  and  the 
stronger,  therefore,  the  trend  toward  larger  units  of  pro- 
duction and  of  organization.     That  these  economies  of  pro- 


COSTS  IN  LARGE  BUSINESSES  467 

duction  touch  no  limit  on  the  hither  side  of  monopoly  is 
commonly  not  true,  but  it  is  clear  that  they  ordinarily  go  so 
far  toward  monopoly  as  greatly  to  reduce  the  number  both 
of  plants  and  of  competitors  and  as  greatly  to  facilitate  the 
process  of  combination.  Perhaps,  also,  it  is  true  here  that 
competition  comes  finally  to  be  of  a  most  disastrous  sort, 
which  can  be  escaped  only  by  combination. 

Costs  in  giant  competitive  production.  —  In  determining, 
therefore,  at  any  given  time,  the  costs  of  product  and 
in  fixing  the  volume  of  product  to  be  marketed,  the  giant 
competitive  business  confronts  a  twofold  problem :  (1)  In 
what  degree,  if  at  all,  does  the  existing  plant  figure  in  the 
cost  computation,  beyond  those  extra  expenses  of  up-keep 
which  the  current  product  imposes?  Insurance  and  rent 
and  decay  are  items  of  expense  that  do  not  wait  on  product. 
(2)  What  is  the  relation  between  the  extra  cost  and  the  extra 
selling  price  which,  once  reached,  is  effective  to  veto  any 
further  extension  of  production?  When  and  why  comes 
the  point  of  stopping? 

Temporary  cost  does  not  exclude  loss.  —  Recalling  that 
the  end  in  view  is  always  the  widest  possible  margin  of  net 
gain  —  the  maximum  fund  for  the  payment  of  interest  on 
bonds  and  dividends  on  stocks  —  and  that  the  years  to  come, 
as  well  as  the  current  year,  must  be  taken  into  account,  it 
is  again  apparent  that  actual  loss  may  be  accepted  rather 
than  permit  an  established  clientele  to  be  scattered  or  an 
efficient  body  of  employees  to  be  dispersed.  Or  it  may  be 
that  the  tangible  plant  may  be  better  and  more  cheaply 
protected  from  depreciation  by  operating  it  than  by  allow- 
ing it  to  lie  idle  to  rust  and  decay.  Temporarily,  then,  the 
necessary  returns  from  operation  may  not  be  inconsistent 
with  some  degree  of  loss  —  the  minimum  of  loss  possible 
in  the  situation,  a  loss  accepted  as  the  condition  on  which 
an  even  greater  loss  is  avoided.  In  truth,  the  original  in- 
vestment was  entered  into  in  full  view  of  the  fact  that  times 
of  wide  margins  alternate,  in  the  general  run  of  things,  with 
times  of  meager  margins,  or  even  of  loss.  And  precisely 
because  the  long-time  cost  computation  is  a  forward-look- 
ing computation,  it  comes  about  that  the  aggregate  of  plant 


468  THE  ECONOMICS  OF  ENTERPRISE 

and  equipment  in  any  industry  is  adjusted  to  the  prospective 
long-time  average  of  tlie  market.  Despite  frequent  asser- 
tions to  the  eontrary,  it  is  not  true  that  the  productive  equip- 
ment is  always  and  generally  in  excess  of  the  needs  of  the 
market,  in  any  other  sense  than  that,  as  new  plants  are 
constructed  with  the  latest  methods  and  appliances,  other 
plants  are  either  already  out  of  date  or  are  approaching  their 
fate  of  displacement.  There  is,  then,  always  this  supply 
of  marginal  equipment,  falling  partly  on  either  side  of  the 
line  of  abandonment,  some  of  it  starved  of  up-keep  and  pro- 
gressively deteriorating,  some  of  it  held  idly  in  reserve 
against  the  temporary  emergency  of  a  brisk  demand,  but 
all  of  it  obsolescent  and  destined  shortly  to  the  wrecker  or 
the  scrap  pile.  Adequacy,  for  long-time  purposes,  then, 
makes  it  inevitable  that  the  existing  equipment  is  more  than 
adequate  for  times  of  depression  and  of  limited  consumption, 
and  yet  is  correspondingly  short  of  adequacy  for  the  periods 
of  brisk  demand. 

Idle  plants.  —  In  those  lines  of  production  in  wliich  the  costs  of 
delivery  are  especially  high  and  in  which,  therefore,  the  plants  have 
to  be  widely  scattered  to  serve  the  trade  of  separate  fields,  it  is 
probable  that  some  unemployed  plants  —  plants  which  are  a  tem- 
porary surplus  in  their  special  fields  —  are  almost  alwaj^s  to  be  found. 
And  it  is  probably  true,  also,  that  each  competing  firm  or  corpora- 
tion may  find  that  emergency  plants  in  times  of  liigh  prices  afford 
gain  sufficient  to  more  than  balance  the  losses  of  nonuse  in  dull  times 
and  to  justify  the  maintenance  of  a  volume  of  equipment  somewhat 
greater  than  the  average  year  w^ll  employ.  With  falling  rates  of 
interest,  also,  this  balance  of  gain  from  emergencey  plants  becomes 
doubtless  somewhat  more  marked.  When  combination  occurs, 
these  marginal  or  submarginal  plants  are  the  plants  likely  to  be 
dismantled  or  to  remain  closed  at  all  times  other  than  those  of  a 
very  high  pressure  of  demand.  In  large  part,  indeed,  the  surplus  or 
reserve  plant  is  maintained  by  the  buying  out  of  new  or  weak  or 
faiUng  competitors. 

Three  possible  cases.  —  The  business  policy  of  the  pro- 
ducing concern  must  then  be  considered  under  each  of 
these  three  possibilities :  (1)  a  normal  or  average  market, 
(2)  periods  of  brisk  demand,  (3)  periods  of  depressed  demand. 


COSTS  IN  LARGE  BUSINESSES  469 

(1)  Average  conditions.  —  The  period  of  average  or  normal 
demand  is  the  time  when  most  of  the  plants  will  be  operated 
at  the  volume  of  product  to  which  they  are  best  adapted. 
It  is  not  really  true  that  a  given  plant  can  indefinitely  ex- 
tend its  output  at  a  constantly  lowering  cost  per  unit  of 
product.  The  lowest  cost  is  at  the  ideal  capacity.  It  may 
well  be  true  that  a  more  extensive  plant  could  attain  to 
still  greater  economies,  if  only  the  average  level  of  demand 
were  such  as  to  justify  the  larger  plant.  Possibly,  also,  the 
long-time  trend  toward  better  technique  in  the  factory,  and 
toward  lower  transportation  rates,  may  make  for  wider 
areas  of  marketing  from  one  center,  for  larger  industrial 
units,  and  for  lower  costs  per  unit  of  product.  But  it  is 
not  true  that  the  maximum  economies  of  production  are 
possible  for  any  plant  through  the  largest  possible  output 
of  product.  Rather  is  it  true  that  for  more  product,  the 
plant  should  have  been  larger.  More  machines  to  a  given 
space,  more  men  to  each  machine,  more  machines  to  the 
existing  power,  more  raw  material  in  the  actual  yard  room, 
more  raw  material  to  the  limited  storage  capacity  —  all 
these  are  sins  against  the  law  of  the  proportion  of  factors. 
They  imply  and  involve  increasingly  wasteful  processes  of 
production.  Thus,  for  example,  in  1907,  the  pressure  of 
traffic  was  so  great  upon  the  railroads  of  the  American  west, 
the  congestion  so  acute,  as  to  increase  the  unit  costs  of  serv- 
ice and  as  probably  to  justify  the  claim  of  the  roads  that 
their  rates  must  be  advanced  in  order  to  avoid  a  substantial 
loss  in  net  revenue.  The  "  bumper  "  crop  may  easily  attain 
a  size  to  spell  misfortune  to  the  railroad  inadequately 
equipped  for  the  emergency  task.  Nor,  obviously,  —  ex 
vi  termini,  —  can  any  railroad  wisely  go  far  in  maintaining 
a  permanent  equipment  for  emergency  tasks.  This  is,  in- 
deed, hardly  better  than  a  truism.  That  a  business  is  at 
any  particular  time  suffering  either  by  overequipment  or  by 
underequipment,  means  that  the  proportion  of  factors  best, 
in  the  average  and  in  the  long  run,  for  price  results,  is  tem- 
porarily not  the  best.  Were  the  new  and  higher  level  of 
demand  likely  to  be  permanent,  the  plant  would  reasonably 
call  for  enlargement.     But,  if,  for  long-time  purposes,  it  be 


470  THE  ECONOMICS  OF  ENTERPRISE 

re2;arded  as  undesirable  to  make  an  all-around  increase  in 
the  plant  of  any  railroad  or  industrial  unit,  the  best  equip- 
ment for  temporary  purposes  must  be  reached  through  a 
proportioning  of  factors  which  would  be  a  maladjustment  for 
long-time  purposes. 

But  our  present  assumption  is  that  the  adaptation  is 
precise  between  capacity  and  demand  —  an  assumption 
which  evidently  will  rarely  hold,  either  for  any  particular 
plant  or  for  the  aggregate  of  productive  capacity.  To  in- 
crease the  product  for  any  plant  so  adapted  will,  it  is  true, 
return  a  gain  upon  more  items,  but  will  cut  into  the  average 
gain  per  item.  Nor  is  it  possible  to  enlarge  the  sales  from 
any  one  plant  excepting  upon  terms  of  a  cutting  of  prices 
in  order  to  attract  trade  away  from  competitors.  This,  were 
it  done,  would  finally  defeat  its  own  end ;  a  larger  volume 
of  purchasing  would  be  stimulated  by  the  lower  prices,  and 
a  volume  of  products  would  be  called  for  too  large  for  the 
best  conditions  of  cost.  The  marginal  gain  from  each  item  of 
product  would,  therefore,  suffer  in  two  ways  —  by  higher 
costs  and  by  lower  prices. 

(2)  Exceptionally  favorable  conditions.  —  Evidently,  how- 
ever, the  chances  are  indefinitely  great  that  the  actual  situa- 
tion will  not  be  that  one  to  which  the  plant  is  best  adapted. 
Assuming  now  that  the  demand  is  brisk,  that  the  market 
call  for  goods  has  established  a  level  of  prices  making  it 
possible  for  the  plant  under  consideration  to  reap  larger 
gains  by  pushing  its  product  beyond  the  volume  to  which, 
as  a  matter  of  the  economies  of  production,  the  plant  is  best 
adapted  —  where  shall  the  limit  be  fixed  ?  Allowances 
must  be  made  here  for  the  courtesies  of  competition,  the 
degree  in  which  trade  solidarity  is  recognized,  the  prevailing 
code  of  fair  competition  —  a  code  commonly  the  better 
accepted,  the  smaller  the  number  of  competitors.  Some- 
thing of  the  principle  of  combination  will  be  recognized,  a 
notion,  obscurely  held  and  indefinitely  applied,  of  the  gen- 
eral good  of  the  order.  These  incompletely  competitive  busi- 
nesses will,  indeed,  allow  themselves  to  be  led  into  a  consider- 
able straining  of  capacity,  but  none  the  less  will  commonly 


COSTS  IN  LARGE  BUSINESSES  471 

draw  the  line  an  appreciable  way  short  of  that  product  which 
each  individual  interest,  exclusively  considered,  would  advise. 
The  prices  will  no  doubt  be  higher,  but  will  not  be  allowed 
to  induce  a  volume  of  product  imposing  a  very  serious  rise 
in  the  cost  levels  of  production.  A  wide  average  margin  of 
gain  upon  a  somewhat  increased  volume  of  produce  will  be 
preferred  to  the  narrower  margins  possible  with  a  greatly 
increased  volume  of  product. 

As  a  question  of  principle,  however,  we  are  not  the  less 
interested  to  understand  the  manner  in  which  an  increasing 
cost  is  attached  to  an  increasing  product.  It  is  evident 
that  to  assign  to  each  machine  a  larger  number  of  operators 
or  to  each  operator  more  assistants  and  tenders,  is  a  policy 
which  must  early  set  its  own  limit.  Some  overtime  may 
doubtless  be  obtained  from  the  existing  corps  of  laborers. 
But  this  commonly  involves  an  extra  rate  of  pay  for  the 
overtime  and,  if  long  continued,  reacts  unfavorably  upon 
the  efficiency  of  the  laborers  per  hour.  If  the  increase  of 
market  demand  is  very  great,  a  second  shift  of  men  may  be 
engaged.  But  it  is  not  practicable  to  run  the  full  plant  with 
a  half  quota  of  men ;  and  enough  efficient  laborers  are  not 
commonly  available  for  merely  a  four-  or  five-hour  daily 
shift.  Again,  when  all  employers  in  the  industry  are  call- 
ing for  more  labor,  men  of  a  high  grade  of  efficiency  are  not 
easily  found  at  a  wage  to  permit  of  their  gainful  employ- 
ment. Night  labor  is  likely  to  be  expensive  in  its  ratio  of 
product  to  outlay. 

(3)  Adverse  conditions.  —  The  years  of  restricted  con- 
sumption present  a  problem  more  difficult  of  analysis. 
Meager  or  vanishing  returns  upon  the  investment  are,  as 
we  have  seen,  probable.  But  here,  again,  it  must  be  kept  in 
mind  that  the  largest  possible  net  gain  or,  if  loss  must  occur, 
the  smallest  possible  net  loss,  is  the  end  in  view.  The 
nearer  the  plant  can  be  run  to  its  normal  capacity,  the  lower 
may  be  the  unit  cost  of  the  goods,  and  the  larger  the  volume 
of  products  over  which  the  fixed  charges  —  e.g.,  interest  and 
insurance  and  managerial  expense  —  may  be  spread.  The 
temptation,  then,  is  to  maintain  the  product  at  its  norm 


472  THE  ECONOMICS  OF  ENTERPRISE 

through  the  ofTer  of  special  concessions  to  the  clientele  of 
competitors.  But  retaliation  is  forthwith  inevitable;  and, 
as  the  probable  outcome,  a  demoralized  market  and  serious 
losses.  To  avoid  these  complications  and  to  fend  against 
these  losses  is  one  of  the  strongi'st  forces  making  for  combina- 
tion. In  the  lack  of  concerted  action  in  this  direction  for  the 
elimination  of  competition,  there  is  nothing  for  the  case  but 
to  appeal  to  the  code  of  fair  competition,  with  its  partial 
recognition  of  the  solidarity  of  trade  interests. 

A  simple  illustration  will  make  clear  these  dangers  in  competition  : 
Suppose  that  Mrs.  A  and  Mrs.  X  are  rival  boarding-house  keepers, 
each  with,  say,  15  boarders,  at  a  weekly  rate  of  $5 :  to  what  limit 
can  Mrs.  A  afford  to  cut  the  rate  in  order  to  lure  from  Mrs.  X's 
establishment  one  of  Mrs.  X's  boarders?  No  extra  burden  of  rent 
or  heat  or  light  or  table  furnishings  or  services  need  attend  this 
additional  boarder.  The  extra  outlay  for  raw  materials  is  the  only 
necessary  debit.  Evidently,  then,  Mrs.  A  may  enjoy  a  margin  of 
gain  from  a  price  from  this  extra  boarder,  which,  applied  to  all  her 
boarders,  would  mean  insolvency.  If  this  extra  boarder  wiU  prom- 
ise not  to  divulge  his  special  rate  —  and  will  keep  faith  —  he  may 
have  his  board,  say,  at  $2.50. 

Nevertheless,  Mrs.  A  will  be  unwise  in  making  this  attack  upon 
her  friend,  the  enemy,  across  the  street.  If  only  Mrs.  X  will  also 
keep  the  peace,  A  may  well  be  careful  not  to  disturb  it.  If  either 
opens  the  price-cutting  contest,  there  is  nothing  for  the  other  to  do 
but  to  follow  suit.  Special  concessions  will  become  general,  and  the 
common  rate  for  all  the  boarders  will  fall  to  a  level  at  which  the 
boarding-house  business  is  an  impossibilitj'.  The  only  thing  either 
safe  or  practicable  is  to  recognize  a  standard  of  "fair  competition" 
and  to  abide  by  it. 

So  pools  and  combinations.  —  For  precisely  similar  reasons  the 
railroads  find  it  necessary  either  openly  or  secretly  to  restrict  their 
competitions.  When  traffic  is  scant,  no  appreciable  extra  expense 
attends  the  making  of  a  freight  train  a  car  or  two  longer.  If,  by 
concessions  in  rates,  this  surplus  traffic  may  be  procured  at  the 
ex-pense  of  competitors,  whatever  small  increase  in  receipts  there  is 
is  so  much  extra  gain  for  the  rate-cutting  road — provided  only  that 
this  rate  can  be  kept  a  secret  from  the  other  patrons  and  that  the 
other  roads  do  not  meet  the  attack  with  similar  methods. 

Monopoly  present  in  degree.  —  The  limitation  upon  com- 
petitive supply  is,  in  truth,  arrived  at  by  processes  at  vari- 


COSTS  IN  LARGE  BUSINESSES  473 

ance  with  the  ultimate  logic  of  competition.  The  tempta- 
tions toward  surplus  product,  or  toward  price  cutting  upon 
some  portion  of  the  product,  are  controlled  through  a  more 
or  less  consistent  recognition  of  the  solidarity  of  trade  in- 
terests and  of  the  necessity  of  sacrificing  a  direct  and  imme- 
diate individual  gain  to  the  interests  of  the  aggregate  good 
of  the  trade.  Whoever  provokes  a  war  of  railroad  rates, 
or  a  contest  in  price  cutting,  shares  with  the  rest  in  the  re- 
sulting disaster.  He  would  better  abide  by  the  expressed 
or  tacit  "  gentleman's  agreement."  The  penalties  bind 
him  even  if  his  promise  does  not. 

There  are,  nevertheless,  fields  of  activity  in  which  the 
principle  of  community  of  interest  has  thus  far  received 
small  application.  Surplus  product  —  that  part  of  the 
product  not  marketable  at  the  level  of  the  average  unit 
cost  —  may  be  disposed  of  in  some  foreign  market  without 
either  inevitable  or  probable  demoralization  of  the  domestic 
market.  Especially  is  this  opportunity  of  surplus  market- 
ing abroad  open  to  a  domestic  monopoly  or  to  different  com- 
peting producers  behind  the  walls  of  a  protective  tariff. 

To  summarize :  Cost  in  the  ordinary  sense  applies  to  the 
industries  of  expensive  equipment  only  as  a  forward-looking 
and  long-time  average  cost  against  average  return.  For  the 
short-time  or  seasonal  period,  it  applies  only  so  far  as  these 
expenses  are  expenses  that  can  be  attributed  to  any  specific 
portion  of  the  product,  and  applies  then  only  as  fixing  a  more 
or  less  elastic  limit  to  the  volume  of  supply.  If  the  cost  com- 
putation is  to  be  serviceable  as  explaining  the  extent  and  the 
limitation  of  the  supply  of  any  particular  time,  under  the 
modern  conditions  of  giant  and  specialized  undertakings, 
items  of  debit  not  commonly  taken  into  the  account  in  the 
traditional  cost  analysis  will  have  to  be  included.  The  cost 
law,  at  its  broadest  and  most  inclusive  statement,  indicates, 
as  we  have  seen,  the  point  at  which  product  or  added  product 
cancels  as  many  price-measured  facts  as  it  adds  to  the  total 
of  sales  in  terms  of  price.  The  theory  here  is,  in  substance, 
not  unlike  the  theory  of  monopoly. 


CHAPTER  XXVI 

COMBINATION   AND    MONOPOLY 

Definition.  —  Monopoly  is  the  antithesis  of  competition. 
As  there  is  the  more  of  the  one,  there  is  the  less  of  the  other. 
Either  is,  therefore,  a  matter  of  degree.  So  monopoly  ranges 
all  the  way  from  an  approximately  complete  control  of  a 
market  situation,  down  through  the  partial  monopoly  to 
the  point  of  disappearance  in  the  even  competitive  level. 
And  inasmuch  as  in  the  degree  that  there  is  competition 
to  that  degree  there  is  not  monopoly,  it  is  bad  usage  to  at- 
tach the  term  monopoly  to  cases,  say,  of  the  ordinarj^  owner- 
ship of  land.  If  there  is  any  competition  anywhere,  it  is 
precisely  in  agricultural  production;  of  all  people  the 
farmers  are  most  individualistic,  least  prone  to  organiza- 
tion, and  least  likely  ever  to  reach  it.  Neither  with  land  nor 
with  other  property  is  the  receipt  of  a  rent  the  distinctive 
characteristic  of  the  presence  of  monopoly  —  but  only  of 
ownership. 

To  define  monopoly  as  the  absence  of  competition  is  simple 
enough  and  clear  enough,  if  only  competition  were  already  defined 
or  were  easy  of  definition.  Either,  but  not  both  at  once,  will  suffice 
for  the  other.  But  precisely  because  competition  is  the  harder  to 
define,  it  is  perhaps  the  better  place  to  make  a  beginning. 

Competition  defined.  —  In  its  widest  and  most  inclusive,  but 
not  in  its  technically  economic  sense,  competition  is  a  state  of  mind, 
a  temper,  an  attitude.  So  far,  indeed,  is  it  a  state  of  mind  that  it  is 
an  institution.  Every  institution  is,  in  fact,  an  established  similar- 
ity of  thought  and  action  as,  for  example,  manhood  suffrage  or 
representative  government.  To  speak  of  competitive  economic 
institutions  suggests  the  fact  that  in  business  affairs  men  act  individ- 
ualistically  and  selfishly,  and  without  regard  to  the  welfare  of 
others  as  an  end  in  itself.     The  thought  includes,  also,  something 

474 


COMBINATION  AND  MONOPOLY  475 

more  than  rivalry  or  emulation ;  the  end  of  economic  competition  is 
individual  gain  in  terms  of  price ;  the  purpose  is  separatist  in  motive 
and  in  working,  rather  than  cooperative  and  collective. 

In  essentials,  therefore,  the  higgling  of  traders  is  competitive. 
Buyers  and  sellers  are  bargaining  each  to  the  end  of  getting  as  much 
as  possible  for  himself  out  of  the  other  and  of  giving  as  little  as 
possible.  The  temper  is  one  of  antagonism,  of  contest,  of  direct 
self-seeking  at  the  other's  prejudice,  or,  at  least,  without  regard  to 
the  other's  welfare. 

But  this  is  to  push  the  meaning  of  the  term  further  than  ordinary 
economic  usage  permits  or  connotes  —  though  not  further  than  it 
should  logically  go.  Psychology  and  ethics  would  pronounce  the 
relations  between  demand  and  supply  competitive,  as  surely  they 
are  if  submitted  to  the  test  of  temper  and  purpose.  But  competition 
as  an  economic  term  is  usually  narrower  than  this.  It  has  not  to  do 
with  the  relations  between  the  two  sides  of  the  price  equation,  but 
only  with  the  relations  between  different  operators  on  the  same  side 
—  with  the  relations  of  producers  of  a  particular  article  to  other 
producers,  or  of  sellers  with  sellers,  or  of  buyers  with  buyers.  But  in 
any  case  competition  implies  that  each  actor  is  separately  and  in- 
dependently and  selfishly  seeking  his  own  individual  maximum  of  gain. 
He  acts  by  himself  and  for  himself.  Any  pooling  of  interests  with 
other  interests,  or  any  slightest  consideration  of  other  interests,  is 
inconsistent  with  the  concept.  The  competitive  man  is,  in  his 
psychology,  as  solitary  a  hunter  as  a  cat.  Spiritually,  he  is  as 
isolated  a  thing  as  a  billiard  ball,  an  atom,  a  monad,  a  star.  All 
things  that  he  does  he  is  set  to  do  by  himself  and  for  himself.  His 
plans  may  be  far  reaching,  but  they  do  not  intend  the  gain  of  any 
other ;  neither  courtesy  nor  good  will  —  nor,  for  that  matter,  ill 
will  —  can  have  any  i^art  in  the  case.  In  strict  logic  there  is  no 
place  for  qualities  like  consideration  or  gratitude  or  courtesy  or 
envy  or  revenge  or  ill  will  in  the  whole  dull  lexicon  of  gain.  It 
suffices  that  men  will  do  what  they  agree  to  do  where  it  is  wise, 
know  what  is  going  on,  recognize  their  own  interests,  and  pursue 
them  rationally,  consistently,  unswervingly. 

Combination  implies,  then,  the  restriction  of  competition,  in  the 
sense  merely  that  some  of  the  men,  not  the  less  competitive  in  spirit, 
are  acting  together  in  order  better  to  carry  on  the  fight  against  all 
the  rest,  whether  sellers  or  buyers.  There  is  in  some  measure  a 
pooling  of  issues  to  the  common  interest  of  the  members  of  the  pool 
— a  pack  hunt,  not  in  any  weakened  zest  for  gain,  not  less  ruthlessly, 
but  only  jointly,  in  groups  —  a  small  center  of  peace  or  a  vortex  of 


476  THE  ECONOMICS  OF  ENTERPRISE 

contractual  calm,  around  wliich,  but  not  within  which,  the  immiti- 
gable strife  goes  on.  Some  smaU  leaven  or  adulteration  of  coopera- 
tion gets  into  the  case,  but  it  is  a  cooperation  to  the  end  of  a  more 
cflfecti\'c  working  out  of  the  purposes  of  competition. 

Monopoly  is  merely  combination,  the  restriction  of  competition 
—  competition  carried  to  higher  levels.  At  the  logical  limit  of  com- 
bination all  competitors  in  the  ordinary  technical  sense,  all  individ- 
uals upon  the  same  side  of  each  demand  and  supply  equation,  would 
be  harmoniously  organized  —  competitively  grouped  within  the 
cohimon  fortifications  —  the  guns  all  pointing  outward  against  the 
common  foe,  the  other  side  of  the  market. 

Monopoly  competitive  in  purpose  and  origin. — It  is,  then,  evident 
that  in  temper  and  purpose,  combination  and  monopoly'  are  not  less 
competitive  than  the  so-called  competition  of  the  technical  terminol- 
ogy, but  are  merely  a  more  effective  form  of  competition.  There 
is  a  small  oasis  of  peace  within  the  barrier,  in  order  that  there  may  be 
a  bitterer  and  more  destructive  war  against  outsiders.  It  is  still  a 
hunt  for  gain,  but  it  is  under  the  better  technique  of  the  pack  organ- 
ization. As  a  league,  both  of  offense  and  of  defense,  it  may  indeed 
go  so  far  as  to  erase  the  necessity  of  the  defen.sive  function  —  with  a 
more  than  compensating  gain  in  its  efficiency  of  offense. 

Nor,  in  fact,  are  these  cooperations  and  communities  of  interest 
more  than  superficial.  In  ultimate  purpose  and  in  final  result,  the 
original  individualistic  and  separatist  motive  still  prevails.  It  is 
true  merelj^  that  cooperation  presents  itself  to  the  individual  as  his 
best  method  of  achieving  his  original  and  unchanged  purpose  of 
individual  gain.  On  the  scent  or  in  the  fight  he  makes  common 
cause  with  his  pack.  But  in  the  division  of  spoils  he  is  still  a  solitary 
eater.  The  means  change,  but  the  end  persists.  Wliatever  other 
and  different  thing,  better  or  worse,  the  cooperations  of  socialism 
might  imply,  the  principle  of  brotherhood  exists  no  more  inside  than 
outside  the  actual  modern  corporation  or  partnership  or  trust. 
Combination,  as  we  shall  shortly  see,  is  merely  another  aspect  or 
stage  of  competition,  or  a  corollary  of  it. 

Good  and  ill  in  competition.  —  It  is  true,  though  perhaps 
the  emphasis  upon  the  truth  has  been  somewhat  overdone, 
that  any  scheme  of  social  organization  which  should  exclude 
all  phases  of  economic  competition  would  involve  the  loss 
of  important  advantages.  As  there  is  ill  in  competition,  so, 
also,  there  is  good.  And  as  there  is  good  in  the  extension 
of  governmental  functions,  so,  also,  there  is  ill.     In  the  ideal 


COMBINATION  AND  MONOPOLY  477 

adjustment  of  things  it  could  hardly  be  best  —  and  in  the 
actual  on-going  of  things  it  is  not  credible  —  that  the  future 
see  the  application  of  either  of  these  antagonistic  prin- 
ciples to  the  exclusion  of  the  other.  In  human  history  things 
move  rather  by  the  adjustment  of  cut  and  try  and  compro- 
mise than  according  to  logical  and  schematic  and  thorough- 
going systems  of  thought  or  action.  The  future,  then, 
will  probably  retain  each  of  the  two  principles  where  its 
working  is  salutary.  The  problem  will  be  in  finding  the  lines 
and  points  of  adjustment  best  promising  to  retain  the  good 
that  is  in  each  principle  and  to  avoid  the  bad.  Govern- 
mental regulation  is  occasionally  a  wise  and  necessary  com- 
promise between  the  two  opposing  policies. 

Broadly  viewed,  economic  competition  on  the  part  of 
producers  is  an  attempt  to  undersell  one  another,  to  find 
a  profitable  way  of  offering  —  or  appearing  to  offer  —  more 
for  less.  On  the  part  of  buyers,  it  is  an  attempt  to  get  most 
for  least.  Speaking  generally,  and  subject,  as  we  have  seen, 
to  important  limitations,  it  is  a  method  by  which  one  mem- 
ber of  society  gets  most  from  society  by  rendering  the  larg- 
est service.  So  far,  it  is,  in  outworking,  a  defective  but  auto- 
matic method  of  proportioning  rewards  to  benefits.  And  it 
is  fairly  clear  that  in  the  absence  of  the  ingenuity  which 
competition  has  stimulated,  the  economic  progress  achieved 
by  the  race  could  hardly  have  been  possible. 

Laissez  faire.  —  But  that  the  interests  of  society  are 
greatly  subserved  by  the  elastic  energy  and  ingenious  ini- 
tiative which  belong  to  individual  interest  and  which  ob- 
tain their  fullest  manifestation  in  the  competitive  system, 
does  not  compel  the  admission  that  social  interests  are  in 
every  case  subserved  by  the  fullest  play  of  individual  in- 
terests. The  interest  of  each  is  not  always  parallel  to  the 
interest  of  all.  Even  if  the  interest  of  each  were  always 
rightly  understood  by  him,  it  would  not  always  conform  to 
the  social  interest.  And  if  the  individual  not  only  goes 
wide  of  the  social  interest,  but  of  his  own  as  well,  there  is  not 
the  less,  but  the  greater,  divergence  between  social  and  in- 
dividual interests. 


478  THE  ECONOMICS  OF  ENTERPRISE 

It  docs  not  strike  the  individual,  for  example,  that  he  is  greatly 
interested  not  to  pollute  the  springs  and  streams  below  him.  He  is 
interested  that  a  rule  should  exist  against  pollutions  generally,  and 
that  other  people  should  obey  the  rule,  but  not  that  he  himself  obey 
it.  So,  open  and  closed  seasons  for  fishing  and  hunting  are  neces- 
sary for  the  aggregate  good  ;  but  the  better  the  laws  are  observed  by 
others,  the  greater  the  advantage  to  you  and  me  from  violating  them. 
The  very  existence  of  monopolies  rests  upon  the  fact  that  while  a 
large  social  product  is  for  the  aggregate  good,  a  restriction  of  produc- 
tion in  the  special  line  of  each  producer  is  often  of  enormous  advan- 
tage to  him.  So,  again,  it  is  for  the  comfort  of  the  lucky  possessor  of 
four  seats  in  the  passenger  coach  that  he  lounge  upon  them  all, 
while  fellow  travelers  stand.  Something  like  a  government  is 
necessary  here  in  the  presence  of  the  conductor.  Likewise  it  is  well 
for  the  government,  through  a  policeman,  to  stand  at  the  street 
crossings  and  adjust  the  conflicting  interests  of  foot  travelers  and 
traffic ;  otherwise  you  and  I  could  never  get  across  the  street. 
Almost  all  crimes  against  property  illustrate  the  antagonism  between 
the  individual  and  the  general  good.  One  of  the  aims  of  socialism 
is  to  escape  this  clash  of  interests ;  perhaps,  however,  this  is  just 
where  it  will  fail.  How  shall  any  one  find  strenuous  effort  to  be  for 
his  own  interest?  If  he  produce  twice  as  much,  his  share  will  be 
increased  by  one  ninety-millionth,  —  no  great  matter.  As  a  prac- 
tical question,  each  will  be  interested  simply  that  every  one  else 
work  nimbly,  while  he  himself  takes  things  easy.  It  is  hard,  even 
in  the  small  horizon  of  a  schoolroom,  for  the  individual  to  see  that 
he  must  in  his  own  interest  guard  the  privileges  and  comforts  of  all. 

Wastes  in  competitive  production.  —  While  it  is  true  that 
in  competition  there  are  strong  tendencies  toward  economies 
in  production,  it  is  equally  true  that  in  some  cases  competi- 
tion brings  about  great  wastes.  While  it  often  results  in 
improvement  in  the  quality  of  the  product  or  in  reduction 
of  prices,  in  other  cases  it  results  in  the  wasteful  multipli- 
cation of  retailers,  in  the  dear  cheapnesses  of  adulteration 
and  "  scamping,"  in  the  false  pretenses  of  advertising, 
in  bad  sanitation  and  bad  hygiene  for  men  and  women,  and 
in  the  moral,  mental,  and  physical  disasters  of  child  labor. 

Mere  fact  of  laws  discredits  laissez  faire.  —  If  the  indi- 
vidual's understanding  of  his  own  interest  conformed  at 
all  times  to  the  social  interest,  the  need  of  laws  would  mostly 
cease.     The  doctrine  of  the  economic  harmonies  runs  close 


COMBINATION  AND  MONOPOLY  479 

to  anarchism.  On  the  other  hand,  no  purely  socialistic 
scheme  is  justifiable,  unless  upon  the  assumption  that  there 
is  no  distinguishable  and  retainable  balance  of  benefits  in 
any  of  the  tendencies  of  competition. 

Competition  often  self-destructive.  —  But  some  of  the  tend- 
encies of  competition  seem  destructive  of  its  primary  char- 
acteristics ;  for,  from  one  point  of  view,  be  it  repeated, 
combination  and  monopoly  are  mere  aspects  of  competition. 
It  is  a  commonplace  that  the  extension  of  the  giant  industry 
at  the  expense  of  the  small  is  a  competitive  product ;  so 
of  the  tendency  toward  corporate  organizations,  —  toward 
trusts,  pools,  monopolies,  and  the  other  forms  of  organized 
industrial  combination.  But  these  secondary  aspects  of 
competition  differ  in  the  degree  in  which  they  retain  the 
primary  competitive  characteristics.  In  proportion  as 
they  fail  of  this,  they  become  awkward  of  treatment  to  the 
economist  and  perplexing  to  the  moralist  and  legislator. 

No  harm  in  mere  size.  —  There  is  nothing  of  especial 
seriousness  in  the  mere  organization  of  industry  on  a  large 
scale,  though  considerable  is  to  be  said  of  its  benefits  —  and 
dangers.  But  sufficient  room  remains  for  the  competitive 
feature  in  the  rivalries  of  numerous  producers ;  while,  at 
the  same  time,  organization  seems  possible  to  a  sufficient 
extent  to  obtain  all  or  nearly  all  of  the  possible  economies 
in  production.  With  some  others  of  the  different  lines  of 
industry  (for  example,  with  transportation  industries  and 
with  industries  in  which  the  costs  consist  largely  of  trans- 
portation outlays,  as  in  the  coal,  oil,  water,  gas,  and  electric- 
light  industries),  the  maximum  economies  in  production 
seem  possible  only  on  terms  of  the  exclusion  of  competition. 

No  harm  in  mere  economies  of  size.  —  Now,  it  is  evident 
that  these  resulting  economies  are  not  the  sources  of  any 
considerable  evil  or  perplexity;  the  awkwardness  of  the 
case  lies  in  the  fact  that,  competition  being  excluded,  it  is 
practically  certain  that  society  will  get  none  of  the  advan- 
tages of  these  economies,  but  that,  on  the  contrary,  the  low 
price  possible  to  the  monopoly  will  discourage  all  outside 
competition,  and  the  monopoly  be  thereby  enabled  not  only 
to  reap  the  entire  benefit  of  its  possible  economies,  but  to 


4S0  THE  ECONOMICS  OF  ENTERPRISE 

collect  from  society  something  over  and  above  the  price 
which  would  prevail  under  the  full  and  wasteful  action  of  com- 
petition. And  not  only  is  competition  avoided  by  the 
superior  advantages  of  the  large  combination,  but  it  is  also 
destroyed  by  the  method  of  cutthroat  competition,  —  the 
trial  of  financial  endurance  in  doing  business  at  a  loss,  —  or  is 
prevented  by  the  menace  of  it. 

Monopoly  costs  and  profits.  —  The  theory  of  monopoly 
profits  is  a  development  from  the  theory  of  value.  The 
normal  competitive  price  is  the  price  remunerative  to 
the  long-time  marginal  sacrifice  in  production.  This  price 
may  be  considerably  lower  than  that  possibly  obtainable 
from  some  or  all  consumers,  were  such  higher  price  imposed. 
With  some  commodities,  a  change  in  price  does  not  greatly 
affect  the  disposition  to  consume.  In  these  cases  a  con- 
siderable advance  in  price  is  possible,  with  no  considerable 
reduction  in  sales,  but  with  severe  encroachment  on  that 
indefinite  quantity  indicated  under  the  term  "  consumer's 
surplus."  (See  Chap.  V,  p.  51.)  It  is  the  consumer's  surplus 
which  the  monopolist  manipulates  to  appropriate.  The 
extent  of  his  operations  will  be  limited  at  the  outside  by  the 
point  at  which  his  increase  in  profit,  by  reason  of  increased 
price,  approaches  an  equality  with  his  decrease  in  profit 
on  account  of  diminished  sales.  This  adjustment  is  a  sepa- 
rate problem  for  each  industry  ;  and  the  danger  of  attracting 
competition  may  fix  a  lower  limit  in  price  than  the  theoret- 
ical limit  above  indicated. 

The  monopoly  principle  finds  frequent  illustration.  Fruit 
occasionally  becomes  so  plentiful  in  the  market  as  to  sell  for  almost 
nothing.  Half  as  much  would  sell  for  more.  The  price  must  go 
so  low  that  all  of  the  supply  can  find  buyers.  If  the  sellers  could 
combine,  it  would  be  to  their  advantage  to  withdraw  a  half  of  the 
supply,  and,  if  need  were,  let  it  rot.  Again,  one  could  hardly  give 
away  a  hundred  bananas  to  ten  ordinary  people  for  their  own  eating, 
yet  could  probably  sell  one  half  or  one  fourth  as  many  at  a  very 
appreciable  price.  Not  many  decades  ago  an  English  company, 
ha\4ng  a  monopoly  of  the  spice  trade,  sank  a  whole  shipload  of 
spices  off  the  coast  of  England.     These  cases  further  illustrate  that 


COMBINATION  AND  MONOPOLY  481 

antagonism  between  utility  and  price   already  many  times  re- 
marked. 

The  trend  toward  monopoly.  —  The  proposition  that  where 
combination  is  possible  competition  is  impossible,  would 
be  approximately  correct  if  changed  to  read  that  to  the  extent 
that  combination  is  possible  competition  is  impossible. 
But  we  are  unable  to  determine  the  extent  to  which  methods 
of  combination  may  be  applied.  There  are  certain  industries 
which  seem  rightly  termed  natural  monopolies.  Most  or 
all  of  these  depend  to  a  peculiar  degree  on  the  use  of  natural 
opportunities  or  natural  forces,  or  are  intimately  associated 
with  the  industries  of  transportation.  To  the  degree  that 
the  sources  of  supply  or  the  number  of  producers  is  limited, 
combination  becomes  more  feasible  and  more  dangerous.  It  is 
forcibly  claimed  that  a  large  proportion  of  all  such  monopolies 
are  made  by  legislation  or  are  permitted  by  legislation.  To 
what  degree,  if  at  all,  this  is  true  will  not  be  here  discussed. 

Purchasers'  combinations.  —  Some  attention  must  be 
given  to  combinations  among  purchasers.  These  are  com- 
monly more  subject  to  competition  and  are  less  durable  than 
producers'  combinations ;  but,  in  theory,  the  analogies  are 
close  between  the  two. 

We  have  seen  that,  in  the  long  average,  price  cannot  fall 
below  the  marginal  producer's  sacrifice  ;  it  may  remain  above, 
though  if  perfect  competition  exists,  this  marginal  sacrifice 
is  to  be  regarded  as  indicating  the  normal  price.  If  neces- 
sary, a  large  number  of  producers  could  afford  to  produce 
and  sell  at  lower  than  the  market  price.  It  is  evident, 
therefore,  that  by  actual  agreement  or  by  tacit  understand- 
ing among  the  purchasers  in  any  given  market,  the  price 
paid  can  be  to  a  large  extent  controlled,  to  the  positive  loss 
of  the  marginal  producer,  and  to  a  diminution  of  the  gains 
of  all  the  producers  above  the  margin.  The  buyers'  com- 
bination is  an  attack  on  producers'  surpluses,  parallel  to 
the  attack,  through  sellers'  combinations,  upon  consumers' 
surpluses.  It  is  true  that  this  buyers'  combination  must 
result  in  a  restriction  of  the  supply  to  the  extent  that  the 
lower  price  discourages  producers  at  or  near  the  margin  of 
2i 


482  THE  ECONOMICS  OF  ENTERPRISE 

production ;  but  as  to  producers  above  the  margin,  the 
opportunity  will  still  remain  to  the  combination  buyers 
of  appropriating  a  considerable  share  of  the  producers'  mar- 
gins. To  the  extent,  clearly,  that  the  total  suppl}'  in  the 
consumers'  market  is  diminished  by  the  combination  tac- 
tics of  middlemen,  market  prices  will  tend  toward  advance, 
and  a  corresponding  additional  gain  accrue  to  the  operators ; 
and  if,  as  sometimes  happens,  these  operators  are  at  the  same 
time  in  practical  control  of  the  selling  market,  the  diminished 
expense  of  combination  buying  may  be  made  the  source  of 
additional  gain  in  combination  selling. 

It  is  asserted  that  the  purchase  of  cereal  products  in  rural 
markets  illustrates  the  working  of  buyers'  combinations, 
and  that  the  meat-packing  industries  of  the  United  States 
illustrate  the  cumulative  effects  of  the  double  combination. 

Monopoly  and  restricted  supply.  —  It  may,  indeed,  be 
said  that,  in  the  main,  competitive  theory  and  monopoly 
theory  do  not  diverge,  that  the  supply  and  demand  analysis 
applicable  to  competition  applies  without  change  to  monop- 
oly, and  that  monopolj^  differs  from  competition  only  in 
the  fact  that  in  monopoly  the  volume  of  supply  is  under 
centralized  control,  while  in  competition  the  limit  of  supply 
is  found  in  marginal  cost  of  production. 

So  presented,  there  appears  to  be  little  to  say  about 
monopoly  in  this  aspect  of  the  case.  The  analysis  is  sim- 
plicity itself,  when  once  the  competitive  market  analysis  is 
thoroughly  grasped.  The  only  problem,  in  conducting  a 
monopoly,  appears,  indeed,  to  be  the  purely  administrative 
problem  as  to  the  wise  point  of  limitation  upon  the  supply, 
with  its  corollary,  the  determination  of  the  market  price. 
Saved  costs  and  higher  prices  on  the  one  side  are  to  be  set 
over  against  a  smaller  total  of  sales  on  the  other  side,  all  to 
the  purpose  of  arriving  at  an  adjustment  promising  a  maxi- 
mum of  gain.  And,  as  we  have  seen,  all  these  adminis- 
trative computations  are  susceptible  of  reduction  to  the 
traditional  cost  categories.     (See  Chap.  XX^\) 

The  pressure  toward  monopoly  :  Economies  of  production. 
—  Our  task  is  rather  to  subject  to  theoretical  analysis  the 


COMBINATION  AND  MONOPOLY  483 

forces  which  are  either  leading  or  driving  industry  into  some 
one  or  another  of  the  various  forms  or  degrees  of  monopoly. 

Were  the  only  force  making  for  monopoly  the  added 
economies  of  production  attaching  to  the  increasing  size 
of  the  technological  unit  or  to  larger  business  organization, 
it  is  probably  safe  to  say  that  the  cases  of  monopoly  would 
be  few.  There  are,  doubtless,  advantages  of  these  sorts  — 
in  cheaper  buying,  in  more  economical  selling,  in  avoidance  of 
cross  freights,  in  smaller  outlays  for  advertising  and  for  com- 
mercial travelers,  and  also  in  some  measure  in  a  more 
efficient  central  management  or  in  better  proportions  be- 
tween the  managerial  factors  and  the  other  factors. 

Most  of  the  advantages  of  giant  production  or  of  large 
organization  are,  however,  reached  and  passed,  a  good  way 
on  the  hither  side  of  the  last  possible  step  of  integration. 
All  that  is  needed  is  the  great  size.  The  economies  which 
monopoly  adds  to  size  are  of  minor  importance.  The  busi- 
ness with  ten  thousand  or  twenty  thousand  employees  has 
access  to  as  many  economies  as  a  business  several  times  as 
great ;  or,  if  this  be  not  always  in  strictness  true,  it  avoids 
as  many  wastes  in  other  directions.  The  advantages,  then, 
that  go  with  size  imply,  obviously,  a  small  number  of  com- 
petitors, but  do  not  require  the  elimination  of  competition. 

The  chief  inducement  to  monopoly  lies  in  the  advantage 
of  monopoly  buying  and  of  monopoly  selling ;  and  the  chief 
means  of  bringing  about  or  of  maintaining  a  monopoly  — 
where  it  is  not  cordially  entered  into  —  is  in  the  use  of  cut- 
throat competition.  The  fact  that,  at  the  ruling  level  of 
monopoly  prices,  the  margins  of  gain  are  wide  is  not  sufficient 
to  attract  competition,  if  it  be  equally  clear  that  so  long  as 
competitors  are  in  the  market  there  will  be  no  margins 
at  all. 

But  the  advantages  of  monopoly  buying  and  selling  are 
so  great  as  commonly  to  avoid  the  necessity  of  discipline 
or  compulsion.  Competitors  are  ordinarily  anxious  enough 
not  to  remain  competitors.  The  advantages  in  prospect  are 
however  not  mainly  in  the  achieving  of  wide  margins  of  gain, 
but  more  commonly  in  the  avoidance  of  occasional  serious 
loss.     The  forces  which  render  competition  dangerous  among 


4S4  THE  ECOXOMICS  OF  ENTERPRISE 

heavily  capitalized  industries  (see  Chap.  XXV)  arc  the  very 
forces  which  push  most  compellingly  toward  combination. 
Only  on  the  basis  of  some  more  or  less  thoroughgoing  accept- 
ance of  the  monopoly  principle  is  the  menace  of  insolvency 
to  be  avoided.  The  magnates  of  the  giant  industry  are  in 
this  respect  submitted  to  the  necessities  of  the  modern  situa- 
tion and  are  powerless  against  it.  Cheap  transportation 
has  made  the  giant  industry  possible  by  making  possible 
the  purchasing  of  raw  materials  and  the  marketing  of  prod- 
ucts over  a  wide  area  from  one  center.  But  these  same 
lower  costs  of  transportation  have  taken  from  each  pro- 
ducer his  relatively  distinct  and  separate  market,  have  made 
each  the  competitor  of  all  the  others  everywhere,  and  thus, 
for  businesses  of  heavy  investment  in  fixed  capital,  have  made 
unrestricted  competition  impossible.  There  is  nothing  for 
them  but  to  divide  the  field  by  agreement,  or  to  divide  by 
agreement  the  business  of  the  general  field,  or  to  restrict 
by  some  other  method  the  competition  in  this  general  field. 
Combination  or  coalition  is  as  necessary  to  giant  production 
as  are  pools  or  communities  of  interest  or  consolidation  to 
transportation  companies.  The  economies  of  combination 
on  the  technical  side  have  unquestionably  been  greatly 
exaggerated,  but  the  disastrous  price  cutting  of  competition 
has  been  even  further  from  adequate  recognition.  If  so- 
ciety is  to  have  the  products,  the  investors  must  be  permitted 
to  follow  those  methods  which  alone  can  provide  an  ade- 
quate return  upon  investment. 

Unwise  legislation.  —  To  show,  therefore,  that  the  exac- 
tions of  monopolies  are  in  large  part  made  possible  by  over- 
protective  tariffs  and  by  unwise  patent  laws,  or  to  prove  that 
the  narrowed  field  of  operations  inside  the  tariff  barrier  has 
much  simplified  the  problem  of  successful  organization, 
is  not  at  all  to  indicate  that  the  trust  problem  can  be  solved 
by  the  reduction  or  abolition  of  tariffs  or  by  the  much  needed 
reform  or  repeal  of  the  patent  laws.  Trusts  are  merely  more 
easily  formed  under  favoring  legislation  and  are  more  ex- 
tortionate under  the  fostering  of  tariffs.  But  there  is  no 
reason  to  believe  that  they  would  fail  to  exist  under  impartial 
legislation  and  free  trade.     Looked  at  from  the  point  of  view  of 


COMBINATION  AND  MONOPOLY  485 

the  investor,  the  need  of  combination  would  simply  be  the 
greater.  It  would  probably  be  as  easy  now  for  the  Steel 
Corporation,  with  its  half  billion  of  surplus  from  ten  years 
of  operation,  to  organize  the  steel  industry  of  the  world  as 
it  was  originally  to  organize  the  American  field.  And  under 
free  trade  this  need  would  be  the  more  imperative. 

Control.  —  The  necessary  inference  from  the  foregoing 
analysis  is,  then,  (1)  that  combinations  are  inevitable,  (2) 
that  regulation  is  equally  inevitable.  Monopolies  cannot 
be  allowed  to  do  whatever  they  will.  Competition,  if  it 
could  endure,  would  itself  be  regulative.  But  when  com- 
petition disappears,  other  regulation  must  take  its  place ; 
there  is  no  third  possibility  but  uncontrolled  exploitation. 

In  some  cases  probably  this  regulation  will  have  to  go  as 
far  as  the  limitation  or  the  fixation  of  selling  prices.  But 
in  any  case,  (1)  profits  of  promotion  will  have  to  be  limited ; 
(2)  the  issues  of  securities  supervised ;  (3)  the  separation 
of  ownership  from  control,  through  various  combinations 
of  securities,  prevented ;  (4)  full  publicity  required ;  (5) 
interlocking  directorates  prohibited  —  though  this  is  likely 
to  avail  little ;  (6)  adequate  taxation  imposed  ;  (7)  progres- 
sive participation  by  government  in  the  dividends  provided 
for. 

The  combinations  of  trusts.  —  It  is  well,  however,  to  see 
the  ultimate  problem  clearly.  The  trusts  are  serious  enough, 
and  the  problems  directly  and  obviously  connected  with 
them  are  sufficiently  difficult ;  but  the  great  and  the  menac- 
ing problem  is  less  obvious  and  much  more  serious.  It  is 
in  the  individual  and  group  controls  that  lie  back  of  the 
trusts.^  It  is,  in  substance,  the  progressive  movement  toward 
a  trust  of  trusts. 

^  "  There  are  not  merely  great  trusts  and  combinations  which  are  to 
be  controlled  and  deprived  of  their  power  to  create  monopolies  and 
destroy  rivals ;  there  is  something  bigger  still  than  they  ere,  and 
more  subtle,  more  evasive,  more  difficult  to  de?A  with.  There  are 
vast  confederacies  (as  I  may  perhaps  call  them  for  the  sake  of  con- 
venience) of  banks,  railways,  express  companies,  insurance  com- 
panies, manufacturing  corporations,  mining  corporations,  power  and 
development  companies  and  all  the  rest  of  the  circle,  bound  together 


4S6  THE  ECONOMICS  OF  ENTERPRISE 

Monopoly  features  in  all  business.  —  But  for  theoretical 
purposes  it  is  more  to  the  purpose  to  note  the  fact  that  there 
is  in  almost  all  prosperous  businesses  a  very  considerable 
element  of  monopol3\  For  example,  the  average  market 
price  of  bank  stocks  in  any  great  city  is  probably  25  points 
above  the  liquidating  value.  This  differential  is  in  the  earn- 
ing power  of  the  going  business,  its  established  connections, 
its  clientele  and  its  reputation.  That  these  things  are  capi- 
tal is  sufficiently  proved  by  the  selling  price.  The  best 
asset  of  the  Ivory  Soap  Company,  as  Professor  Veblen  has 
wisely  remarked,  is  the  motto,  "  It  Floats."  So,  the  value 
of  a  newspaper  property  is  commonly  mostly  in  what  is 
known  as  its  "  good  will  and  subscription  list."  This  sort 
of  thing  is  likely  to  have  been  costly  of  attainment ;  but, 
costly  or  not,  it  is.  It  may,  without  expense,  have  attached 
little  by  little  to  pioneership  in  the  field  —  to  the  mere  fact 
that  the  business  is  now  a  long-established  business.  But, 
in  any  case,  it  is  a  differential  advantage  against  which  new 
competitors  must  wage  a  long  and  costly  contest  in  achieving 
an  equal  footing.  Nothing  is  harder  or  more  expensive  to 
establish  than  a  successful  newspaper  in  a  great  city.  In 
the  main,  it  is  not  worth  trying.  The  gains  of  the  older 
business   are   thus   mostly   safe   from    competition.     Thus, 

by  the  fact  that  the  ownership  of  their  stock  and  the  members  of 
their  boards  of  directors  are  controlled  and  determined  by  compar- 
atively small  and  closely  interrelated  groups  of  persons  who,  by 
their  informal  confederacy,  may  control,  if  they  please  and  when 
they  will,  both  credit  and  enterprise.  There  is  nothing  illegal  about 
these  confederacies,  so  far  as  I  can  perceive.  They  have  come  about 
very  naturally,  generally  without  plan  or  dehberation,  rather  be- 
cause there  was  so  much  money  to  be  invested  and  it  was  in  the 
hands,  at  great  financial  centers,  of  men  acquainted  with  one  another 
and  intimately  associated  in  business,  than  because  anyone  had 
conceived  and  was  carrying  out  a  plan  of  general  control ;  but  they 
are  none  the  less  potent  a  force  in  our  economic  and  financial 
system  on  that  account.  They  are  part  of  our  problem.  Their 
very  existence  gives  rise  to  the  suspicion  of  a  '  money  trust,'  a  con- 
centration of  the  control  of  credit  which  may  at  any  time  become 
infinitely  dangerous  to  free  enterprise.  If  such  a  concentration  and 
control  does  not  actually  exist,  it  is  evident  that  it  can  easily  be  set 
up  and  used  at  will."  —  Woodrow  Wilson,  Speech  of  Acceptance, 
Aug.  7,  1912. 


COMBINATION  AND  MONOPOLY  487 

iA  the  very  definition  of  the  term,  here  is  monopoly.  And 
this  monopoly  is  something  that,  in  differing  degrees,  attends 
almost  all  established  businesses  —  some  of  it  an  increment 
richly  earned,  some  of  it  the  mere  good  fortune  of  priority, 
but  all  of  it  capital.  Many  great  banks  manifest,  as  we  have 
seen,  an  earning  power  out  of  all  proportion  to  their  assets, 
an  earning  power  which  competition  appears  safe  never  to 
menace. 


CHAPTER  XXVII 

THE    SOCIAL    DIVIDEND    AND    THE    INDIVIDUAL    INCOME 

Ultimate  income  is  psychic.  —  All  income,  whether  social 
or  individual,  must  finally  resolve  itself  into  the  use  of  the 
good  things  in  life  that  are  only  to  be  attained  at  some  sort 
of  cost.  Money  incomes,  of  course,  there  are ;  and  as  in- 
termediates toward  ultimate  incomes  they  are  of  supreme 
importance.  But  their  real  significance  rests  solely  on  what 
can  be  had  from  them  and  for  them.  Ultimate  income  is 
not  the  cash  received,  nor  even  the  things  which  the  cash 
will  buy,  but  the  benefits  which  these  things  render.  In 
the  ultimate  sense,  then,  money  income  resolves  itself  into 
what  Professor  Fetter  has  termed  psychic  income  —  that  is 
to  say,  into  the  unfree  utilities  which  the  money  indirectly 
and  the  goods  directly  afford  or  control. 

The  aggregate  income.  —  Before  inquiring,  however,  what 
individuals  come  to  enjoy  the  good  things  which  bear  a  price 
or  which  could  command  a  price,  and  why  and  how  these 
individuals  come  to  this  enjoyment,  we  must  inquire  what 
good  things  there  are  to  enjoy  and  whence  these  good  things 
come.  What  is  production?  and  who  and  what  are  pro- 
ductive? But  in  thus  formulating,  for  the  present  purpose, 
our  question,  we  are  not  inquiring  as  to  what  things  are 
individually  gainful,  how  individuals  get  money  incomes  for 
their  own  purposes,  but  only  what  is,  in  the  ultimate  sense, 
the  total  product  in  society  to  be  enjoyed.  We  are  set  to 
examine,  frovi  the  social  point  of  view,  the  aggregate  dividend 
of  society,  the  distrihuendum. 

But  note  that,  from  the  social  point  of  view,  we  have  no 
concern  with  those  things  which  are  merely  useful  as  dis- 
tinguished from  valuable.  Things  so  plenty  that  any  one 
can  have  them  for  nothing  present  no  economic  problems. 

488 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    489 

They  are  not  economized,  because  they  need  not  be.  In 
the  economic  sense  of  the  term  they  are  not  distributed 
through  the  economic  process  —  which,  be  it  recalled,  is  a 
price  process. 

What  things  are  to  be  had  with  money  income.  —  The 
distributive  problem  relates,  then,  to  the  process  which 
apportions  among  the  different  gain-seekers  their  various 
quotas  of  the  good  things  in  life  —  of  those  good  things 
that  go  at  a  price,  that  get  into  the  market,  that  are  bought 
and  sold,  that  may  be  brought,  and  are  actually  brought, 
under  the  price  denominator  —  the  things  that  one  pays  a 
price  for  to  get  or  refuses  a  price  for  to  keep.  Not  all  good 
things  surely  are  so  bought  or  held  ;  and  there  are  some  that 
cannot  be.  One  does  not  absolutely  have  to  have  a  dollar 
in  order  to  believe  in  the  goodness  of  God  and  to  be  comforted 
thereby,  though  it  may  require  many  dollars  to  be  eloquently 
and  authoritatively  informed  about  God.  One  may  have 
health  with  poverty  —  the  more  the  poorer  —  though  it  is 
obviously  easier  to  have  or  keep  the  health  if  one  is  rich. 
And  one  may  conceivably  enjoy  both  the  health  and  the  pov- 
erty. Wordsworth  informs  us  that  love  may  be  found  "  in 
huts  where  poor  men  lie  "  ;  nor  commonly  can  any  one  bar 
another  out  with  a  price  from  "  the  silence  which  is  in  the 
starry  sky,  the  sleep  that  is  among  the  lonely  hills  "  —  un- 
less, indeed,  one  works  and  must  live  where  one  cannot  see 
the  sky,  and  has  neither  the  time  nor  the  car  fare  to  get  away 
to  the  hills.  To  go  is  evidently  easier  with  the  money  ;  and 
the  hills  in  the  neighborhood  may  have  been  allowed  to 
become  the  parks  or  the  hunting  preserves  of  the  people 
who  have  the  money.  But  even  if  it  be  admitted  that  love 
and  pity  and  respect  and  place  are  not  rarely  bought  and 
sold  upon  the  market  at  a  price,  it  is  not  less  clear  that  not 
all  of  these  are  there  all  of  the  time.  There  are  offices  that 
seek  the  man  as  such ;  and  there  is  respect  for  honest  pov- 
erty; and  there  is  praise  for  the  scientific  discovery  that 
pays  no  dividends ;  and  there  is  fame  for  the  singer  whose 
songs  command  no  royalties. 

Thus,  the  distribuendum  does  not  include  all  of  the  values 
in  life,  but  only  those  which,  being  adapted  to  the  price 


490  THE  ECONOMICS  OF  ENTERPRISE 

denominator,  are  submitted  to  it  and  received  under  it. 
Whatever  the  cynics  may  say,  there  are  some  good  things 
that  money  cannot  buy,  as  there  are  oth(>r  good  things  that, 
when  bought,  are  no  longer  good.  But  on  the  whole  it 
still  stands  as  true,  despite  the  optimists  and  the  sentimen- 
talists, that  the  good  things  in  life  are  mainly  for  those  that 
can  pa3'  for  them.  No  one  of  us  really  believes  that  it  is 
just  as  well  to  have  S500  a  year  as  $5000  ;  nor  is  it  true,  how- 
ever much  the  well-to-do  may  comfort  themselves  with  vol- 
unteering this  sort  of  solace  to  the  poor.  It  is  mere  smug 
talk.  All  that  can  safely  be  said  is  that  incomes  do  not 
multiply  in  service  as  they  multiply  in  size.  And  on  the 
side  of  prestige  and  power  and  envy,  even  this  is  probably 
not  true. 

Psychic  income  dependent  on  money  income.  —  To  ex- 
plain, then,  the  distribution  of  the  objective  things  and  facts 
which  render  services  to  human  beings,  we  must  explain 
the  distribution  of  money  incomes  in  society  and  of  all  those 
things  that,  were  they  exchanged,  would  command  a  money 
price.  The  eggs  and  butter  and  garden  products  consumed 
upon  the  farm  are,  it  is  true,  not  marketed  in  the  ordinary 
sense,  but  could  be  marketed,  and  thus  possess  exchange 
power  and  have  a  price  standing.  In  strict  analysis  they 
are  really  a  part  of  the  total  market  supply,  but  remain 
with  the  farmer  because  his  reservation  price  is  greater  than 
the  market  price.  Though  consumed  at  home,  they  are 
incomes.  As  such,  they  explain  in  part  what,  as  tenant,  the 
farmer  pays  in  rent,  or  what,  as  owner,  he  might  collect  as 
rent. 

The  primary  fact  is  goods  for  distribution.  —  It  was  made 
clear  in  an  earlier  chapter  that  much  which,  from  the  in- 
dividual point  of  view,  is  gainful,  competitively  productive, 
is  from  the  social  point  of  view  mere  appropriation  by  priv- 
ilege or  by  levy  of  tribute ;  and  that,  in  the  gain-seeking 
competitive  process,  rents  and  time  discounts  and  wages 
are  as  readily  paid  for  the  means  and  aids  to  parasitism  and 
predation  as  for  the  instruments  and  agents  contributing 
to  the  aggregate  social  product  of  those  things  which  satisfy 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    491 

desires.  But  the  purpose  of  our  present  investigation  is 
to  determine  what  human  activities  and  what  human  pos- 
sessions contribute  to  the  total  satisfaction  of  desire :  what 
are  the  sources  of  the  social  dividend,  the  aggregate  of  valu- 
able utilities  to  be  distributed? 

What  are  valuable  products?  —  No  question  can  now  re- 
main that  wheat,  cloth,  pepper,  books,  whisky,  Peruna, 
corsets,  ribbons,  automobiles,  obscene  books,  cigars  —  and 
so  on  indefinitely  —  are  valuable  products  and  that  the  means 
and  aids  to  their  existence  are  productive.  But  it  is  still  to 
be  emphasized  that  no  mere  means  or  aid  —  land  or  machine 
or  raw  material  —  is  itself  a  product  in  the  ultimate  sense 
with  which  the  present  discussion  has  to  do.  Lands  and 
machines  are  merely  intermediate  or  instrumental  productive 
facts,employed  as  means  to  the  end  of  providing  or  controlling 
ultimate  psychic  incomes.  Only  things  of  ultimate  service 
belong  in  the  social  dividend. 

Not  quite  so  obvious,  perhaps,  but  equally  as  certain,  is 
it  that  all  actors,  teachers,  preachers,  physicians,  singers, 
servants,  gymnasts,  ball  players,  clowns,  ballet  girls,  fortune- 
tellers, heelers,  quacks,  and  prostitutes  —  who  serve  for 
hire  —  are  productive.  That  the  services  are  useful  is 
proved  by  the  fact  that  they  are  wanted  —  consists,  indeed, 
merely  in  this  fact.  That  they  are  valuable  is  manifest  in 
their  being  paid  for.  Therefore,  they  afford  ultimate  eco- 
nomic income. 

Not  all  consumption  is  destruction.  —  But  consumable 
goods  are  not  in  all  cases  identical  with  destructible  goods, 
nor  is  consumption  quite  the  same  thing  as  destruction. 
The  uses  of  wealth  include  more  than  the  eating  and  drink- 
ing and  wearing-out  of  things.  Those  things  which  are 
usually  called  services,  as  distinguished  from  wealth,  are 
obviously  without  appreciable  duration  and,  in  this  sense, 
are  consumed  as  soon  as  they  are  produced.  And  many 
commodities,  for  example  omelettes,  are  almost  as  teniporary. 
And  most  wealth,  it  must  be  admitted,  finds  sometime  a 
limit  to  its  period  of  service.  But  some  goods  wear  out  so 
slowly  that  decades  may  pass  without  any  serious  sign  of 
rust  or  moth  or  decay  or  disintegration.     Yet  even  a  house 


492  THE  ECONOMICS  OF  ENTERPRISE 

of  brick  or  stone  goes  little  by  little  to  wrack  and  wreck  if 
deprived  of  current  investment  in  repairs  and  up-keep. 
And  if,  with  lapse  of  time,  its  walls  do  not  disintegrate  by 
rain  and  sun  and  frost,  it  will  probably  suffer  from  mold 
and  rust  and  discoloration.  And  though  it  might  objec- 
tively remain  intact  and  unharmed,  it  must  probably  some 
day  be  abandoned  as  ancient  or  antiquated  or  ugly.  A 
change  in  desire  suffices  to  make  old  a  thing  still  physically 
intact  and  valid  ;  witness  the  frumpy  horror  that  was  last 
year  a  coveted  bonnet.  By  one  method  or  another  Time  has 
its  way  with  most  things.  But  while  they  last  they  are  giv- 
ing out  their  incomes  of  shelter  or  convenience  or  beauty. 
That  it  takes  a  long  time  to  consume  some  goods  amounts  to 
saying  that  they  render  their  services  over  a  long  period. 

Serviceability  may  increase.  —  Moreover,  it  is  possible 
in  economics  to  go  over  far  in  the  direction  of  these  melan- 
choly musings.  Nothing  endures,  it  is  true,  —  but  true  only 
in  the  sense  that  all  things  change.  They  may,  however, 
change  for  the  better  as  well  as  for  the  worse.  An  interesting 
ruin  may  easily  be  a  more  valuable  property  than  the  original 
castle.  It  really  takes  a  deal  of  time  to  make  some  things, 
wine  for  example,  sufficiently  old.  Grandmothers'  laces 
and  grandfathers'  clocks,  and  violins,  and  paintings  mellow 
in  color  or  tone  or  texture,  or  acquire  that  peculiar  romance 
and  charm  that  attach  to  the  antique.  If  "  fair  virtues 
waste  with  time,  foul  deeds  grow  fair  thereby."  So  far, 
indeed,  as  we  know,  some  things,  diamonds  for  example, 
may  never  wear  out.  In  any  case,  however,  as  the  things 
wear  on  —  and  perhaps  in  time  wear  out  —  the  services 
which  they  render  continue  to  accrue  and  to  make  a  part 
in  the  grand  total  of  goods  enjoyed.  Pictures,  statues, 
bric-a-brac,  furniture,  diamonds,  and  automobiles  are  the 
bearers  of  a  great  annual  aggregate  of  valuable  income.  Like- 
wise lands  afford  not  only  incomes  of  grain  and  lumber  and 
iron,  but  also  incomes  of  standing  and  living  room,  of  con- 
venience, of  social  prestige,  of  political  power,  of  invigorating 
air,  of  sun,  of  shade,  of  beautiful  prospect,  of  seclusion,  of 
conspicuousness.  That  there  are  real  incomes  of  these  sorts 
is  sufficiently  proved  by  the  rents  which  various  sorts  of  land 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    493 

command.  If  these  ultimate  incomes  in  the  social  sense 
were  not  there,  the  payments  would  not  be  there. 

Other  items  in  the  aggregate.  —  The  aggregate  of  income 
in  any  society  for  any  given  length  of  time  is  not,  then,  meas- 
ured by  the  output  of  immediately  consumable  goods  from 
the  shops  and  factories,  together  with  all  the  grain,  vege- 
tables, fruits,  timber,  and  minerals  derived  from  the  land. 
The  instrumental  equipment  of  society,  with  all  the  labor 
applied  to  this  equipment,  does  not  suffice  to  explain  all  of 
the  actual  product.  Nor  is  the  account  complete  when  all 
the  valuable  services  of  human  beings  are  included  —  from 
singers,  preachers,  teachers,  valets,  policemen,  waiters, 
nurses,  physicians,  soldiers,  lawyers,  judges,  and  all  the 
rest ;  the  valuable  services  of  durable  consumption  goods 
have  still  to  be  included. 

Unmarketed  price  facts.  —  Nor  yet  is  the  total  complete : 
as  the  vegetables  and  poultry  and  eggs  consumed  at  home 
are  products,  so  the  housewifely  activities  of  the  women- 
folk, their  dusting  and  cooking  and  bed-making,  their  errand- 
goings  and  slipper-bringings  and  nurse-like  ministrations, 
are  not  to  be  counted  unproductive  by  the  mere  fact  that 
they  are  not,  in  any  usual  sense,  paid  for. 

Privilege  and  power.  —  And  finally,  there  are  incomes  of 
privilege,  place,  power,  and  repute,  attendant  in  some  degree 
upon  all  wealth,  but  especially  attaching  to  wealth  in  ex- 
ceptionally great  individual  or  group  holdings.  Just  as  a 
landed  estate  in  England  carries  with  it  important  social 
and  political  privileges  and  opportunities,  so  in  other  coun- 
tries the  road  to  general  leadership  and  influence,  as  well  as 
the  road  to  senatorships  and  cabinet  positions  and  foreign 
embassies,  may  be  sought  through  the  ownership  of  a  bank 
or  of  a  copper  mine.  To  be  a  railroad  magnate  is  to  enjoy 
the  peculiarly  prized  income  called  power.  There  is,  indeed, 
no  possibility  of  understanding  the  motives  which,  in  a 
competitive  society,  prompt  men  to  the  accumulation  of 
great  wealth  —  and  perhaps  to  its  earning  —  till  the  notion 
of  income  is  expanded  to  cover  all  of  the  ultimate  psychic 
advantages  which  wealth  controls.  The  miser's  income 
from  his  coins  may  be  more  than  the  washing  of  his  hands  in 


494  THE  ECONOMICS  OF  ENTERPRISE 

them,  or  than  tho  enduring  consciousness  that  ho  could 
spend  if  he  would.  He  may  also  be  deriving  great  joy  from 
imagining  how  peojile  will  admire  him  when  he  comes  to 
spend,  or  how  they  would  admire  him  if,  contrary  to  his  pur- 
pose, he  should  ever  come  to  spend.  Some  present  income, 
also,  there  is  from  dollars  to-day  in  the  mere  fact  that  they 
will  command  other  incomes  to-morrow.  This  may  be 
bad  for  some  of  the  theories  of  abstinence,  but  it  must  be 
accepted. 

It  is  not  to  be  denied  that  some  of  these  incomes  are  pos- 
sible only  on  terms  of  a  net  loss  to  other  incomes.  Privilege 
and  power  and  pecuniary  glitter  may  impose  upon  others  a 
burden  greater  than  is  the  gain  to  those  who  achieve.  So- 
cially viewed,  the  costs  may  outrank  the  products.  But 
there  are  still  the  products.  It  may  likewise  be  true  in 
competitive  enterprise  that  the  net  results  of  the  individual 
undertaking  may  not  indemnify  the  outlays ;  but  it  would 
be  still  worse  if  there  were  no  results  at  all.  Probably,  also, 
much  of  the  current  product  in  society  fails  to  justify  the 
pain  and  stress  of  its  production  :  but  it  is  none  the  less  prod- 
uct. The  wastes  of  competitive  production  are  everywhere 
great,  but  this  is  not  to  deny  that  there  are  products  from 
competitive  production. 

Various  distributive  processes.  —  To  make  clear  in  what 
the  aggregate  product  of  society  really  consists  has  been  a 
necessary  preliminary  to  the  examination  of  the  process  by 
which  this  product  is  distributed  among  the  different  in- 
dividual claimants  and  participants.  This  process  the  cost 
analysis,  looked  at  in  its  distributive  aspect,  greatly  illu- 
minates but  does  not  entirely  explain.  Much  of  the  prod- 
uct of  society  —  possibly  one  half  or  two  thirds  of  it  — reaches 
its  final  recipients  by  gift.  Consider  for  a  moment  the  dec- 
orative women,  the  children,  the  invalids,  the  paupers, 
the  insane,  the  prisoners.  Nor  are  gifts  of  this  sort  all  of 
the  gifts  that  there  are.  Remember  that,  in  the  main,  our 
present  problem  concerns  itself  with  the  distribution  of 
purchasing  power  in  society.  Taxation,  for  example,  is  one 
method  of  distribution,  or  of  redistribution.     In  large  part, 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    495 

doubtless,  taxes  are  collected  for  services  which  the  contrib- 
utor receives,  and  are  disbursed  to  the  payees  for  adequate 
services  rendered.  In  some  part,  nevertheless,  this  comfort- 
ing general  truth  does  not  hold :  there  are  sinecures  —  as, 
for  example,  with  most  of  the  large  postmasterships.  There 
are  fat  contracts,  pensions,  royal  bounties  by  princely  spend- 
thrifts to  clever  courtiers  and  to  thrifty  politicians.  And 
there  are  education  at  the  public  expense,  and  hospitals  and 
asylums  and  prisons. 

Some  part,  truly,  of  his  tax  outlays  the  entrepreneur  may 
compute  as  costs  in  his  enterprise,  but  this  is  possible  only 
so  far  as  the  tax  burdens  are  imposed  by  the  enterprise. 
Consumption  taxes  and  income  taxes  and  all  general  prop- 
erty taxes  that  are  truly  general,  do  not  fall  within  the  cost 
category. 

Property  and  distribution.  —  But  more  important  still 
is  the  fact  that  in  explaining  the  distribution,  both  of  ul- 
timate income  and  of  purchasing  power,  we  have  to  take 
account  of  property  institutions  and  of  the  actual  distribu- 
tion of  property.  Much  of  the  wealth  in  society — wealth 
that  is  not  employed  in  any  intermediate  or  instrumental 
process,  but  instead  is  affording  directly  consumable  income 
—  is  pure  natural  bounty.  Many  of  the  incomes  from  land 
are  of  this  sort  —  practically  all  of  the  incomes  from  residence 
sites,  rents  of  space,  convenience,  air,  sun,  prospect,  prestige, 
neighborly  relations,  and  pecuniary  glory. 

Natural  bounty.  —  There  attach,  also,  to  these  property 
rights  in  natural  bounty  other  great  incomes  which  mani- 
fest themselves,  as  entrepreneur  costs,  in  the  process  of  plac- 
ing goods  upon  the  market.  There  are,  for  example,  agri- 
cultural rents  both  of  position  and  of  fertility,  and  there  are 
position  rents  in  urban  merchandising  and  manufacturing. 
Out  of  the  6i  billions  of  real  estate  values  as  appraised  in 
the  city  of  New  York  in  1911,  63  per  cent  were  ground  values. 
These  were  ordinary  real  estate  values,  exclusive  of  special 
franchises  and  of  the  real  estate  of  corporations.  The  ground 
values  of  the  great  cities  average  about  $1000  per  capita  of 
population,    or   say   $3000   per    breadwinner.     The    owner 


496  THE  ECONOMICS  OF  ENTERPRISE 

of  the  land  controls  its  income  either  in  the  form  of  direct 
benefits  to  himself  or  in  the  form  of  a  money  rent  with  which 
to  command  other  benefits.  Add  to  these  4^  billions  of 
ground  values  in  the  city  of  New  York  the  real  estate  of 
corporations —  160  millions,  more  than  two  thirds  of  which 
is  ground  value  —  and  the  481  millions  of  special  franchise 
values,  and  there  is  disclosed  a  great  total  of  5  billions  of 
property  bases  of  distribution  which  rest  solely  upon  natural 
bounty  or  community  activity.  This  5  billions  of  unearned 
wealth  is  for  the  city  of  New  York  alone,  and  attaches  solely 
to  the  land  or  to  the  local  functions  of  that  city.  What  this 
means  may  be  in  part  inferred  from  the  fact  that  the  statisti- 
cians report  the  total  wealth  of  the  country  at  120  billions 
of  dollars.     (See  Chap.  XXVIII.) 

Franchises.  —  It  is  evident  that  there  are  important  dis- 
tributive influences  to  be  ascribed  to  what  are  commonly 
known  as  intangible  assets  —  property  rights  like  franchises, 
patents,  monopolies,  and  good  will.  The  precise  bearing 
of  these  factors  upon  the  distributive  process  is  difficult  of 
analysis  ;  but  they  may  be  divided  into  three  classes  : 

(a)  With  good  will  commonlj^,  and  with  patents  occa- 
sionally, the  individual  or  corporate  revenues  may  be  col- 
lected from  something  which  either  is  not  an  added  charge 
to  the  public  or  has  behind  it  an  adequate  additional  service 
to  support  the  added  charge.  If  any  moral  or  political 
question  is  involved,  it  must  in  such  cases  refer  to  the 
extent  or  duration  of  the  property  right  and  to  the  ratio 
between  deserving  and  reward.  But  with  natural  bounties 
appropriated  to  private  ownership,  the  question  is  not 
the  reasonableness  of  the  income  received,  but  solely 
whether  this  income  should  accrue  to  private  benefit 
under  individual  ownership.  Those  who  contest  most 
vigorously  for  the  right  of  private  ownership  in  general  — 
e.g.,  the  single-taxers  —  are  precisely  those  who  least  justify 
the  private  ownership  of  natural  bounty. 

(6)  The  second  class  of  cases  is  where  the  patent  or  fran- 
chise or  monopoly  collects  its  exactions  in  charges  which 
appear  as  costs  in  the  entrepreneur  process,  and  which  are, 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    497 

therefore,  in  turn  by  the  entrepreneur  collected  mostly  from 
purchasers,  in  the  guise  of  the  higher  prices  of  the  goods  pro- 
duced. These  exactions  thus  appear  as  distributive  shares 
apportioned  to  these  monopoly  factors  in  production,  which 
factors  forthwith  take  on  capital  values  expressive  of  the 
present  and  prospective  command  of  income.  Many  trusts 
are  engaged  in  supplying  products  entering  as  raw  materials 
into  other  processes.  By  virtue  of  the  restricted  supply  of 
these  materials,  the  entrepreneurs,  conforming  to  the  Law  of 
the  Proportion  of  Factors,  force  higher  the  prices  of  these 
materials,  and  thereby  somewhat  lower  the  prices  of  the 
remaining  cooperating  factors.  Thus  the  consuming  public 
shares  with  the  producers  of  these  other  factors  the  monopoly 
burdens  imposed  upon  industry. 

(c)  In  the  third  class  of  cases  the  monopoly  producer  or 
the  franchise  owner  collects  his  direct  gains  from  the  con- 
suming public  —  which  gains  are  later  to  manifest  themselves 
as  purchasing  power  for  the  control  of  ultimate  income. 
It  is  obvious  that  in  the  main  these  gains  are  achieved  through 
the  restriction  of  production.  The  operators  take  part  of 
the  product  that  is  left,  as  their  reward  for  making  it  as  small 
as  it  is, 

(d)  Franchises,  like  other  monopolies,  are  commonly 
exploited  upon  the  principle  of  charging  what  the  traffic 
will  bear.  Some  restriction  of  service  is  probable  in  most 
of  these  cases  —  a  larger  parallelogram  of  gain,  at  a  smaller 
total  of  service,  but  at  a  wider  margin  of  gain  per  unit  of 
service.  In  the  main,  however,  these  franchise  gains  are 
more  nearly  like  land  rents  —  where  the  gains  must  accrue 
to  some  one,  the  sole  question  being  to  whom,  whether  to  the 
general  public  or  to  private  owners.  In  actual  fact,  as  will 
later  more  fully  appear,  private  properties  of  this  sort  con- 
tribute meagerly  to  the  public  revenues,  being  ral'ely  taxed 
even  to  the  extent  intended  under  the  ad-valorem  principle. 
The  public  burdens,  that  is  to  say,  are  in  the  main  imposed 
upon  the  less  questionable  classes  of  property. 

Great  wealth  as  controlling  more  wealth.  —  But  there  is 
more  to  be  said  with  reference  to  the  relations  of  large  private 
2k 


498 


THE  ECONOMICS  OF  ENTERPRISE 


fortunes  to  the  distributive  process.  The  principle  of  Ad- 
vantage with  Size  appHes  with  especial  force  in  this  connec- 
tion. It  was  pointed  out  in  an  earlier  chapter  (X)  that 
there  is  no  way  by  which  the  joint  output  of  a  particular 
complex  can  be  accurately  imputed  to  the  corresponding 
factors.  Each  factor  gains  by  the  presence  of  every  other. 
The  farmers  with  the  large  farms  and  with  generous  equip- 
ment of  appliances  and  with  adequate  working  funds  are 
proved  by  statistical  investigations  to  enjoy  in  the  average 
the  highest  net  incomes,  after  deductions  are  made  at  the 
current  rate  of  interest  for  the  services  of  the  invested  capital.^ 

'  (From  Bull.  295  of  Agr.  Experiment  Station  of  Cornell  Univ. : 
An  Agricultural  Survey,  pp.  400-442,  passim)  :  "The  average  labor 
incomes  varied  to  a  considerable  extent  with  the  different  town- 
ships, .  .  . 

'' .  .  .  The  owners  and  tenants  in  the  best  to'WTiships  made  nearly 
twice  as  much  as  those  in  the  poorest  to'RTiships. 

"...  Over  one  third  of  the  farmers  who  operate  their  own  farms 
have  less  than  .S4000  invested  in  the  farm  business.  Less  than  one 
third  have  as  high  as  $6000.  Of  even  these  small  amounts  con- 
siderable is  borrowed.  When  we  consider  the  equipment  and  stock 
necessary  to  run  a  farm,  we  cannot  fail  to  reahze  how  much  these 
farmers  are  in  need  of  capital  for  conducting  the  farm  business. 
To  buy  land,  house,  barns,  stock,  and  machinery  with  less  than 
$4000  is  certainly  a  problem. 

"  The  necessity  for  a  reasonable  amount  of  capital  is  shown  by 
Table  7.  The  average  owner  M-ith  less  than  $4000  capital  has  not 
made  as  much  money  (w?ge  of  labor)  as  a  hired  man  receives. 


TABLE    7.     RELATION    OF    CAPITAL    TO    PROFITS. 
FARMS   OPERATED   BY   OWNERS 


615 


Capitai, 

Number 
OF  Fabms 

Average 
Labor  Income 

$2000  or  less 

2001-4000          

4001-6000          

6001-8000          

8001-10000        

10001-1.5000        

Over   15000         

36 
200 
183 
94 
45 
44 
13 

$    192 
240 
399 
530 
639 
870 
1164 

SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    499 

Nor  is  this  to  be  explained  by  the  higher  average  manage- 
rial ability  possessed  by  the  men  who  command  the  largest 
wealth.     The  explanation  is  rather  in  the  fact  that  it  does 

"  It  has  been  suggested  that  the  more  able  men  have  the  larger 
capitals  and  that  the  results  are  due  to  the  man  rather  than  to  the 
amount  of  capital.  But  most  of  the  men  who  made  successes  in 
farming  began  with  small  capitals ;  there  must  be  some  such  men 
beginning  now.  As  a  matter  of  fact  there  are  many  able  men,  both 
old  and  young,  who  are  farming  with  very  little  money.  If  the 
question  is  one  of  the  man,  then  these  should  be  doing  well.  .  .  . 

"Of  36  farmers  with  capitals  of  less  than  $2001,  not  one  made  a 
labor  income  of  $600.  Of  236  who  had  less  than  $4001  capital,  not 
one  made  a  labor  income  of  $1000,  and  only  one  made  as  much  as 
$800.  The  possibilities  of  large  profits  with  so  small  a  capital  do 
not  seem  very  bright. 

"...  Of  57  farmers  with  over  $10,000  capital,  20  made  labor 
incomes  above  $1000.  Six  men  who  operated  their  own  farms 
made  labor  incomes  of  over  $2000.  Their  capitals  varied  from 
$9185  to  $21,786. 

"...  The  average  tenant  with  a  capital  of  less  than  $1001  failed 
to  make  wages.  Those  with  $1001  to  $2000  made  about  the  same 
as  hired  men.     The  average  of  those  over  $2000  was  good.  .  .  . 

"...  One  reason  for  the  low  average  labor  income  in  the  township 
of  Diinby  seems  to  be  the  shortage  of  capital.  The  few  farmers  in 
this  township  who  have  sufficient  capital  seem  to  be  doing  well. 
These  men  have  much  larger  farms  than  the  same  capital  would 
provide  in  other  townships.  .  .  . 

"  The  tenants  on  the  larger  farms  also  make  considerably  more 
than  those  on  small  farms.  .  .  . 

"  There  can  be  no  question  but  that  the  larger  farms  are  paying 
better.  But  some  persons  may  say  that  the  difference  is  due  not 
to  the  size  of  the  farm,  but  to  the  farmer,  and  that  the  better  farmers 
hve  on  the  larger  farms.  If  small  farms  are  the  best  size,  it  would 
seem  as  if  the  more  intelligent  farmers  would  choose  them.  If  the 
more  inteUigent  men  all  choose  large  farms,  there  must  be  some 
reason  for  it.  Certainly  there  must  be  some  good  farmers  Uving 
on  small  farms.  If  the  small  farm  offers  the  best  opportunities, 
these  farmers  should  be  doing  exceedingly  well.  .  .  . 

"  Of  138  farmers  on  farms  of  less  than  61  acres,  only  10  made  a 
labor  income  as  high  as  $600.  Of  234  farmers  with  over  100  acres, 
79  made  over  $600. 

"  Of  138  farmers  on  farms  of  less  than  61  acres,  only  one  man  made 
a  labor  income  of  $1000.  Of  34  farmers  on  farms  of  over  200  acres, 
11  made  over  $1000  labor  income.  .  .  . 

"  In  each  of  the  groups  the  farmer's  labor  income  is  almost  the  same 
as  the  value  of  his  machinery.  ... 


500 


THE  ECONOMICS  OF  ENTERPRISE 


not  pay  to  work  a  small  farm  with  its  correspondingly  small 
equipment.     A  larger  net  return  to  personal  earning  power 

"...  The  average  owner  who  is  -within  three  miles  of  the  market 
makes  about  four  times  as  largo  a  labor  income  as  that  made  by 
those  who  are  over  seven  miles  from  market. 


C600r- 
|500- 


-200 
^100 

5o 


^ 

/ 

y 

> 

\ 

S'' 

f< 

i'^-f 

-J 

fi'=i<^i 

■n 

— 

S 

\ 

■* 

0 

c 

i> 

;+ 

»r 

i 

C( 

to 

K 

s 

01 

r\ 

<.e 

7 
t,  M 

il 

3 
e 

i 

3 

0 

The  average  farmer  makes  a  good  profit  from  the  labor  that 


he  directs. 


^1200 


100  200  JOO  -WO  500  600  700  800  900 1000 
Value  of  Labor  excefrt  Farmers,  Dollars 

"...  On  the  average  the  profits  are  SO  per  cent  of  the  value  of  all 
labor ;  that  is,  the  farmer's  labor  income  is  80  per  cent  of  the  value 
of  the  total  labor  (Table  58)." 

TABLE   58.     RELATION   OF   LABOR   TO    PROFITS 
FARMS   OPERATED    BY    OWNERS 


Value  of  Total  Labor 


5  347  .  . 

426  .  . 

557  .  . 

730  .  . 

960  .  . 

1307  .  . 
Average 


Labor 

Income  per 

Dollar's  Worth 

OF  Labor 


$0.83 
.78 
.78 
.73 
.75 
.91 

$0.80 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    501 

can  be  had  in  the  wage-earning  relation.  This  is  one  of  the 
reasons  for  the  constantly  increasing  size  of  the  average 
farm.  Capital  power  enhances  personal  earning  power  — 
so  far,  indeed,  as  it  is  possible  to  separate  the  two.^  Not 
merely  in  credit  facilities,  and  in  other  working  business 
alliances,  and  in  contests  of  endurance,  but  still  more  in 
the  control  of  official  and  legislative  favors,  in  inside  informa- 
tion, in  the  ability  to  carry  great  risks  and  to  handle  enormous 
contracts,  to  underwrite  great  stock  and  bond  issues,  to 
exclude  competitors  from  equal  privileges,  to  crush  them  in 
stock  exchange  raids  —  do  great  fortunes  grow  by  what  they 
feed  upon.  If,  in  truth,  the  Socialist  shall  ever  find  out  what 
business  capital  really  means  and  how  it  actually  works, 
he  will  learn  something  about  distribution  greatly  to  the 
advantage  of  his  propaganda :  and  therewith  he  will  come 
to  have  less  to  say  in  explaining  the  ill  plight  of  labor  through 
the  separation  of  it  from  its  tools.  Precisely  with  the  so- 
cialistic analysis  as  with  the  classical  analysis,  the  capital 
concept  errs  by  its  overtechnological  emphasis.  Wages 
are  received  in  the  business  process.  Business  capital  is  not 
social  capital. 

From  this  chapter  or  from  those  that  have  preceded,  it 
should  now  be  clear  that  the  total  income  of  society  consists 
of  all  the  different  gratifications  or  benefits  at  human  dis- 
posal, which  are  held  or  sold  at  a  price ;  that  not  only  does 
all  of  this  aggregate  accrue  in  terms  of  price,  but  also  that 
it  is  distributed  under  the  price  mechanism,  in  the  form  of 

^  And  it  is  here  to  be  noted  that  for  some  purposes  it  is  necessary 
for  the  entrepreneur  to  make  this  separation  as  best  he  can.  He 
must  compute  his  costs,  and  in  computing  the:"e  he  may  find  it 
necessary  to  determine  how  much,  in  outlay  or  in  displaced  earning 
power,  a  ppirticular  factor  must  be  computed  to  cost  him  in  its 
present  employment.  It  may,  and  probably  does,  earn  him  more 
than  it  costs ;  precisely  how  much  more  he  is,  in  the  nature  of  the 
case,  unable  to  determine  accurately.  For  distributive  purposes, 
that  is  to  say,  all  imputations  of  return  are  not  merely  inaccurate 
and  unnecessary  for  the  purpose,  but  are  impossible.  Whether 
Mr.  Pierpont  Morgan  as  an  individual  earns  extraordinarily  high 
profits,  or  his  capital  earns  exceptionally  high  interest,  neither 
Mr.  Morgan  himself  nor  any  economist  could  determine.  (See 
Chap.  X.) 


502  THE  ECONOMICS  OF  ENTERPRISE 

price  shares  —  going,  that  is  to  say,  to  the  different  members 
of  society  accordingly  as  they  are  willing  to  pay  a  price  to 
have,  or  to  refuse  a  price  to  hold,  the  various  forms  of  ulti- 
mate income;   that  therefore  the  distribution  of  the  social 
income  is  to  be  explained  through  the  distribution  of  private 
money  incomes ;   that  not  only  is  the  distribution  of  this 
aggregate  so  exjilained  and  controlled,  but  also  in  large  part, 
the  particular  kind  of  income  which  is  produced  is  so  con- 
trolled —  those  members  of  society  who  have  the  ability  to 
pay  determining  what  things  shall  be  produced  and  what 
shall  not ;  that  not  only  do  the  possessors  of  the  great  in- 
comes determine  by  their  own  purchasing  and  consuming 
the   direction  which   the    production   ministering   to   their 
demands  shall  take,  but  also,  by  setting  standards  for  the 
less  prosperous  classes,  determine  in  large  part  what  the 
remaining  production  and  consumption  shall  be ;  that  many 
individual  incomes  accrue  through  contribution  to  the  aggre- 
gate social  product  to  be  distributed  —  accrue,  that  is  to 
say,   as  distributive  shares  in  the  cost  distribution  —  the 
primary  distributive  process ;    that  many  others  accrue  by 
gift,  by  inheritance,  by  sinecure,  by  interest  on  public  se- 
curities, by  patents,  by  franchises,  by  ownership  of  natural 
bountj^,  by  monopoly,  by  adulteration,  by  fraud,  by  ruse, 
and  by  theft ;    that  not  even  all  the  shares  in  the  primary 
distribution  are  received  through  producing  something  of 
social  service,  but  only  by  producing  something  that  some 
one  will  pay  for  —  often,  also,  by  preventing  some  part  of 
that  production ;    that  salaries  may  as  easily  be  earned  by 
defeating  justice  as  by  furthering  it,  by  protecting  brothels 
as  by  closing  them,  by  divulging  an  employer's  secrets  as 
by  keeping  them ;    that  therefore  this  price  distribution  of 
the  aggregate  price  income  of  society  has  in  it  no  warrant 
that  the  shares  received  out  of  it  are  the  correlatives  of 
worthy  contribution  to  it,  or  of  any  other  contribution  to 
it,  or  even  that  they  are  not  derivative  from  interferences 
with  it  or  from  previous  subtractions  from  it. 

The  next  chapter,  the  final  one  of  the  book,  will  again 
emphasize  the  truth  that  all  gainful  activities  are  productive 
in  the  sole  sense  of  the  term  appropriate  to  the  competitive 
economic  order,  and  that  all  objective  bases  of  continuing 
income  to  the  individual  possessor  are  capital,  no  matter 
what  may  be  their  social  significance.     The  chapter  will 


SOCIAL  DIVIDEND  AND  INDIVIDUAL  INCOME    503 

also  trace  the  course  of  development  in  economic  doctrine 
by  which  the  contrary  view  gained  general  acceptance,  and 
still  retains  it.  Having  pointed  out  the  unparalleled  resources 
of  the  American  continent  and  their  rapid  exploitation  by 
the  most  vigorous  industrial  people  of  this  or  of  any  other 
time,  and  having  thereby  emphasized  and  established  the 
extraordinarily  high  per  capita  product  of  American  industry, 
the  chapter  will  sketch  the  relations  between  economic  capital 
and  modern  social  welfare,  and  will  indicate  the  relations  of 
the  great  fortunes  of  the  rich  to  the  poverty  of  the  poor. 
Out  of  this  analysis  the  conclusion  should  be  inevitable  that 
not  the  mal-expenditure  of  incomes,  but  the  mal-receipt 
of  them,  is  the  fact  fundamental  to  present  practical  evils ; 
that  therefore  the  primary  problem  in  American  affairs 
is  the  distributive  problem  —  a  problem  having  its  basis 
in  a  great  institutional  situation  of  property  in  natural 
bounty,  in  privilege,  and  in  exploitation. 


CHAPTER  XXVIII 

THE    DISTRIBUTIVE    ANALYSIS    IN    THE    LARGE 

Purpose  of  this  final  chapter.  —  In  a  discussion  having  to  do 
with  so  many  different  problems  and  with  so  many  different 
aspects  of  each  one  of  these,  the  essential  unity  of  the  ex- 
position is  likely  to  be  obscured.  Somewhere  and  somehow, 
therefore,  the  scattered  threads  and  shreds  of  the  converging 
argument  must  be  assembled  in  order  to  present  their  es- 
sential unity.  The  problem,  then,  and  the  excuse  for  the 
present  chapter,  is  to  get  things  together,  to  summarize  the 
salient  points  in  the  argument,  to  make  definite  the  point 
of  view,  and  to  emphasize  the  doctrinal  unity  of  the  various 
separate  discussions.  In  the  very  nature  of  the  case  there 
must  go  with  this,  not  only  the  risk,  but  the  certainty,  of 
repetition  in  essential  thought.  Occasionally,  indeed,  in 
the  interests  of  emphasis  or  of  clarity,  the  writer  has  allowed 
himself  the  privilege  of  substantial  repetition,  and  not  rarely, 
also,  the  discourtesy  of  literal  duplication. 

Historical  doctrines.  —  Repetition  need  not,  however, 
burden  the  first  steps  of  the  immediate  task.  We  shall  begin 
with  the  attempt  to  trace  the  derivation  of  certain  central 
doctrines  which  furnish  the  dominant  issues  of  later  theoreti- 
cal controversy  —  doctrines,  also,  which  in  the  opinion  of 
the  present  writer  converge  to  the  making  of  one  stupendous 
error  —  or  perhaps  better,  one  great  group  or  congeries  of 
errors  —  doctrines  which  it  is  the  main  purpose  of  the  pres- 
ent volume  to  attack  and  to  refute,  and  thereafter,  if  possible, 
to  replace  with  something  less  wide  of  the  truth.  In  any 
case,  an  adequate  understanding  of  current  issues  will  be 
appreciably  forwarded  by  an  examination  of  the  derivation 
of  the  particular  doctrines  under  consideration. 

There  are  several  of  these :    (1)   the  doctrine  of  unpro- 

504 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE      505 

ductive  labor,  (2)  the  Guidance  of  the  Unseen  Hand,  (3) 
Natural  Law ;  and  as  the  synthesis  or  conclusion  from  all 
these,  (4)  Laissez  Faire.  First  of  this  triad  of  subordinate 
and  concurring  doctrines  —  first  in  importance  if  not  in 
time  — ■  is  the  doctrine  of  unproductive  labor  (and  of  un- 
productive consumption)  —  a  doctrine  the  parent  form  of 
which  long  since  passed  away,  but  which  is  still  very  present 
with  us  in  its  progeny.  The  importance  of  these  must  serve 
as  the  excuse  for  a  somewhat  extended  discussion. 

Unproductive  labor.  —  Barring  the  socialists,  who  still 
upon  occasion  exploit  this  view  with  propagandist  fervor, 
it  may  be  said  that  there  is  to-day  no  one  to  deny  the  pro- 
ductivity of  the  preacher  or  singer  or  actor  or  teacher  or  man 
servant  or  maid  servant.  If  the  artisan  who  constructs  a 
violin  is  productive,  so,  also,  is  the  artist  who  plays  it.  If 
to  grow  wheat  or  to  grind  it  is  economic  production,  so  is 
baking  it.  If  we  may  regard  as  productive  the  industry 
which  furnishes  the  beef,  so  may  we  also  the  industry  that 
cooks  it.  If  a  stock  car  is  productive  in  transporting  beeves 
over  wide  intervals  of  space,  so  likewise  must  be  the  waiter 
who  brings  the  steak  from  the  kitchen  or  passes  it  at  the  table. 
And  precisely  as  we  pay  for  the  transportation  of  com- 
modities, we  pay  to  have  ourselves  transported.  If  a  freight 
car  is  capital,  so  is  a  Pullman.  One  colorist  with  his  brush 
fixes  his  fancies  upon  canvas ;  another  color  worker  by  the 
magic  of  his  words  paints  pictures  on  the  tablets  of  the  mind  ; 
the  fact  that  we  pay  for  either  shows  either  to  be  value 
rendering.  To  create  matter  is  in  truth  given  to  none  of  us  ; 
we  only  arrange  and  combine  and  distribute.  :Nor,  indeed, 
is  the  very  existence  of  matter  better  than  a  hypothesis.) 

All  this  is  clear  enough  in  these  latter  days,  though  not 
yet  fully  accepted  in  all  its  implications.  But  at  an  earlier 
time  the  case  had  a  different  seeming.  Nor  even  now  are 
we  entirely  quit  of  our  confusions ;  ever  and  anon  the  older 
doctrine  echoes  faintly  into  our  time. 

Shifting  center  of  interest :  Cameralistic  doctrine.  — 
Economics  is  always  pragmatic  in  spirit ;  the  problems  of  the 
time  dictate  its  emphasis,  its  methods,  and  its  standards  of 


506  THE  ECONOMICS  OF  ENTERPRISE 

appraisal.  The  beginnings  of  economic  science  were,  there- 
fore, dj'nastic  iu  interest.  The  economist  of  that  time  was 
the  CameraHst,  a  speciahst  and  an  expert  in  stewardship. 
His  problems  regarded  only  the  prince's  welfare  in  the  admin- 
istration of  his  estate.  The  various  flocks  upon  the  plains 
—  two-legged  as  well  as  four-legged  —  were  to  be  husbanded 
and,  in  the  times  and  manners  proper  to  them  respectively, 
to  be  shorn,  the  ends  proposed  being  simply  the  maximum 
possible  revenue  and  the  highest  level  of  dynastic  prosperity'. 
Mercantilism.  —  But  with  passing  time,  the  center  of 
interest  shifted.  National  problems  were  taking  the  place 
of  dj-nastic  problems.  With  this  change  of  interest  there 
took  place  in  some  measure  a  recasting  and  a  reformulation 
of  economic  doctrine.  Attention  turned  from  imperial 
wars  and  bickerings,  and  from  kings  and  their  trumpetings, 
to  questions  of  the  growth  of  peoples  and  to  the  extension  of 
their  power  in  territory,  in  wealth,  and  in  influence.  The  point 
of  view  remained,  however,  consistently  national  as  dis- 
tinguished from  individualistic  and  personal,  and  competi- 
tively national  as  distinguished  from  social  or  cosmopolitan. 
It  was  the  era  of  the  Mercantilist,  the  specialist  in  the  art 
of  national  merchandising,  of  finding  markets  abroad,  of 
selling  things  to  the  outsider  for  money,  of  excluding  the 
outsider  from  the  home  market,  of  compelling  him,  if  he 
did  sell,  to  take  home  with  him  goods  instead  of  money  — 
all  to  the  end  of  getting  his  money  from  him  and  of  keeping 
it  —  a  policy  summing  up  in  the  emphasis  upon  a  favorable 
balance  of  trade.  How,  indeed,  shall  any  people  grow  in 
economic  power  as  against  its  neighboring  enemies?  By 
piling  up  wealth,  by  goodly  accumulations  of  munitions  and 
moneys  and  credits  against  the  time  of  conflict.  And  how 
shall  any  man  or  nation  become  wealthy,  except  by  selling 
more  than  buying,  by  keeping  consumption  under  pro- 
duction? And  how  so  well  extend  your  personal  economic 
dominion  over  your  neighbor  and  over  your  neighbor's 
possessions  —  his  desirable  daughter  included  —  as  by  getting 
him  into  debt  to  you  ?  Or  how  so  well  render  yourself  strong, 
and  at  the  same  time  your  competitor  nation  weak,  as  by 
getting  it  into  debt  to  you,  or,  better  yet,  by  getting  its  pur- 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE     507 

chasing  power  into  your  own  control,  through  cornering  its 
medium  of  exchange?  And  how  accomplish  all  or  any  of 
these  things  unless  by  selling  your  victim  neighbor  or  nation 
more  than  you  buy  back?  Thus  conceived,  with  the  na- 
tionalistic emphasis,  the  whole  question  became  not  pri- 
marily one  of  income,  or  of  aggregate  satisfactions  and  of 
total  consumption,  but  of  accumulation,  and  especially 
of  growth  in  wealth  under  the  form  of  foreign  credits  or  other 
ready  international  purchasing  power. 

Physiocracy.  —  Proceeding  from  substantially  the  same 
point  of  view,  the  physiocratic  school  seemed  to  itself  to 
have  discovered  a  method  better  yet,  —  accumulation  truly, 
but  accumulation  rather  of  population  than  of  wealth. 
Artisans  consumed  as  much  wealth  as  they  produced ;  the 
social  cost  of  their  product  was  as  great  as  their  product. 
Manufactures  were  regarded  as,  in  Dr.  Franklin's  phrase, 
"  subsistence  metamorphosed."  Agricultural  laborers  also 
consumed  all  that  they  produced  or,  at  all  events,  all  that 
they  received  as  wages,  and  seemingly  must  always  com- 
mand so  small  a  wage  as  to  make  this  a  permanent  fact. 
Whatever  the  product  of  labor  and  land  together  might  be, 
the  excess  in  produce  over  the  laborer's  wage  and  necessary 
subsistence  must  go  to  the  landowner  as  the  equivalent  and 
expression  of  the  productiveness  of  the  land.  So  with  agri- 
cultural, also,  as  with  artisan  labor,  the  social  cost  canceled 
the  social  product ;  only  the  land  was  productive  of  net 
product.  But  even  so,  there  was  this  difference  between 
artisan  labor  and  agricultural  labor,  that  artisan  labor  did 
not  increase  the  total  population  maintainable  in  the  country, 
gave  forth  no  subsistence  product,  no  life  material,  while 
the  product  of  agriculture  may  be  regarded  as  population, 
expressed  in  the  form  of  its  raw  material.  And  it  seemed 
clear  that  national  supremacy  was  rather  a  question  of  popu- 
lation than  of  accrued  wealth. 

It  followed  also  that,  inasmuch  as  the  laborer  received 
only  enough  to  live  upon  anyway,  there  was  small  use,  and 
some  harm,  in  trying  to  tax  him.  The  only  man  who,  having 
a  product  net,  a  surplus,  could  pay  was  the  landlord,  the 
rent  gatherer.     If  the  laborers  were  taxed,  it  must  be  at  the 


508  THE  ECONOMICS  OF  ENTERPRISE 

expense  of  their  number.  It  followed  from  this,  then,  that 
the  program  fundamental  to  national  greatness  was  to  foster 
agriculture  as  a  life  maintainer,  the  sole  source  of  increasing 
population,  and  to  tax  the  land. 

The  modern  views.  —  Adam  Smith,  coming  into  the  na- 
tional point  of  view  as  an  inheritance  from  earlier  thought, 
set  himself  deliberately  to  the  investigation  of  the  causes, 
and  to  the  formulation  of  the  rules,  making  for  the  increase 
of  the  opulence  of  nations,  and  found  that  while  manu- 
factures were  productive,  they  were  not  so  in  the  same  sense 
as  agriculture,  while  labor  as  mere  service  was  not  productive 
at  all.  The  shadow  of  physiocratic  reasoning  was  still  over 
Adam  Smith. 

Not  having  arrived  fully  and  consistently  at  the  indi- 
vidual point  of  view  in  economic  analysis,  John  Stuart  Mill 
followed  substantially  in  the  footsteps  of  Adam  Smith.  Un- 
productive consumption  is  consumption  that  does  not  fur- 
nish maintenance  for  productive  labor.  Productive  labor 
is,  in  turn,  that  labor  which  affords  an  addition  to  the  aggre- 
gate accumulated  wealth  possessions  of  society.  Thereby 
he  arrived  at  the  distinction  between  material  and  im- 
material. But  this  distinction  between  material  and  im- 
material rested  not  at  all  upon  considerations  of  utility,  of 
importance  for  consumption  in  the  aspect  of  service  to  human 
needs,  nor  finally  and  fundamentally  upon  some  test  of 
concrete  reality,  or  of  tangibility,  or  of  materiality  in  any 
philosophical  sense,  but  solely  upon  the  aspect  of  permanency. 
For  in  a  general  way,  that  which  is  material  and  tangible 
is  enduring ;  at  any  rate,  that  which  is  not  material,  which 
has  no  substantiality,  is  mostly  evanescent ;  in  coming  to  be 
it  ceases  to  be.  Thus  only  material  things  can  add  to  na- 
tional wealth.  And  that  some  forms  of  material  w^ealth  are 
themselves  very  temporary  in  their  existence,  e.g.,  most 
cooked  foods,  leaves  the  line  between  the  material  and  the 
immaterial  none  the  less  an  actual  line  and,  at  the  same  time, 
a  line  which  coincides  practically  with  the  line  between  the 
things  that  add  to  national  accumulated  riches  and  the  things 
that  do  not  add. 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE      509 

All  of  which  was  excellent  for  its  purpose,  and  need  have 
occasioned  no  perplexity  or  controversy,  if  only  Mill  had 
not  fallen  into  the  error  of  following  his  predecessors  in  their 
bad  choice  of  terms  ;  for  the  line  which  he  was  really  seeking 
was  not  that  between  the  productive  and  the  nonproductive, 
or  between  the  material  and  the  immaterial,  or  between  the 
tangible  and  the  intangible,  but  merely  the  line  between  the 
accumulatable  and  the  nonaccumulatable.  Interpreting 
his  terms  productive  and  nonproductive  in  this  sense,  no  diffi- 
culty is  presented,  excepting,  perhaps,  with  regard  to  the 
significance  of  the  distinction,  as  seen  from  the  point  of  view 
of  a  more  modern  analysis  and  of  its  theoretical  needs.  But, 
either  by  strict  logic  or  by  analogy,  other  things  followed. 
If  material  facts  only  were  wealth  and  material  wealth  alone 
were  economic  product,  then  only  material  goods  were  capital. 
The  economic  process  was  conceived  as  strictly  an  industrial 
and  a  techilical  process.  The  factors  of  production  were 
material  factors  making  for  tangible,  material,  concrete 
results  amenable  to  measurement  by  weight  and  tale.  Thus 
the  different  factors  of  production  fell  into  classes  determined 
by  their  technical  relations  to  a  strictly  mechanical  process 
conceived  on  large  and  general  lines.  The  mechanical, 
concrete,  industrial  equipment  at  the  disposal  of  human 
energy  —  also  mechanically  regarded  —  was  divided  into 
two  clearly  defined  and  comprehensive  classes  corresponding 
to  the  large  and  general  (and  essentially  vague)  distinction 
between  agricultural  and  nonagricultural  production,  or  — 
more  accurately  —  to  the  distinction  between  the  extractive 
and  the  nonextractive  industries.  Hence,  in  part,  the  dis- 
tinction between  land  and  capital. 

Capital  versus  land :  Rent  cost  versus  other  cost.  —  From 
the  social  point  of  view,  also,  though  somewhat  violating  the 
technological  test,  the  distinction  between  land  and  capital 
was  reenforced  by  obvious  differences  of  origin  —  the  genetic 
point  of  view.  Some  part  of  the  material  productive  equip- 
ment comes  by  natural  bounty,  a  gift  of  providence,  a  racial 
heritage  rather  than  a  racial  achievement.  The  produced 
facts  —  products  of  labor  set  aside  for  further  use  in  pro- 
duction —  fitted  passably  well  into  the  capital  category 
already  constructed  upon  technological  distinctions. 


510  THE  ECONOMICS  OF  ENTERPRISE 

Analogies  from  English  law.  —  Perhaps  the  most  important 
corroboration  for  the  distinction  between  land  and  capital, 
and  jiossibly  the  origin  of  the  distinction,  is  to  be  sought  in 
the  jural  backsrouud  of  English  thought.  The  civil  law 
of  England  and,  in  a  large  degre(>,  the  economic,  political,  and 
social  organizations  trace  back  to  feudalism,  a  system  in 
which  land  ownership  was  the  controlling  and  directing  fact 
for  almost  all  purposes,  political  and  economic,  theoretical 
and  practical.  The  line  of  cleavage  between  real  property 
and  personal  property  runs  deep  through  all  English  juris- 
prudence. 

It  would,  then,  be  a  most  interesting  investigation,  if 
only  one  had  the  necessary  learning,  to  trace  out  the  manner 
and  degree  of  connection  between  the  legal  distinction  of 
realty  from  personalty  and  the  economic  distinction  of 
land  from  capital.  That  the  parallelism  is  more  than  merely 
fortuitous  may  be  taken  as  beyond  doubt. 

The  derivative  theories.  —  If  the  foregoing  considerations 
are  to  the  point,  adequate  explanation  is  presented  for  the 
classical  habit  of  confining  the  field  of  economics  to  a  study 
of  the  production,  distribution,  and  consumption  of  w^ealth, 
wealth  being  taken  to  mean  tangible  material  goods;  for  the 
restriction  of  production  to  the  bringing  about  of  material 
results  ;  for  the  construction  of  categories  of  material  factors 
based  upon  material  items  of  equipment ;  and  for  the  dis- 
tribution of  this  store  of  equipment  into  material  nonland 
equipment  on  the  one  hand  as  over  against  land  equipment  on 
the  other  hand. 

That  we,  the  economists  of  these  latter  days,  have  in- 
herited richly  and  gratefully  from  our  forebears  is  equally 
to  our  credit  and  to  our  good  fortune.  Nevertheless  the 
best  of  the  story  is  yet  to  tell.  We  have  still  to  analyze 
the  spiritual  setting  of  these  doctrines  —  their  soul  and  heart 
and  aspiration  —  before  we  can  either  estimate  all  that  they 
meant  to  their  exponents  or  all  that  they  have  signified  to 
us  as  legatees.  Only  so  can  we  measure  the  degree  of  the 
unfealty  of  a  few  of  us  to  the  faiths  of  the  fathers. 

We  need,  that  is  to  say,  to  note  how  far  a  genial  optimism 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     511 

due  to  a  reverent  faith  and  a  reverent  faith  derived  from  a 
genial  optimism  converge  to  reenforce  and  to  extend  and  to 
interpret  the  more  strictly  intellectual  aspects  of  the  classical 
doctrine.  We  need  to  know  the  inspiration  and  the  spirit- 
ual furnishing  of  the  classical  view.  Filially  and  un- 
critically, therefore  —  as  becomes  the  heirs  of  an  estate  — 
a  few  words  must  be  said  of  the  Guiding  of  the  Unseen  Hand, 
of  Natural  Law,  and,  finally,  of  Laissez  Faire. 

Providence  guides.  —  There  are  other  bases  of  optimism, 
doubtless,  but  the  readiest  is  religious  faith.  Seen  in  the 
large  and  in  ultimate  bearings,  things  must  be  going  well  with 
the  world  ;  else  what  can  God  be  about  ?  It  is  given  to  none 
of  us  to  thwart  the  will  of  the  Creator  of  all  of  us.  Whatever 
we  do,  we  must  perforce  be  working  out  the  great  program, 
treading  the  wine  from  His  presses,  milling  out  the  fore- 
ordained grist.  It  cannot  be  but  that  we  are  playing  the 
part  for  which  we  have  been  assigned  to  the  ends  of  the  eternal 
process.  However  great  then  may  be  our  ill  of  purpose, 
there  can  be  no  ill  in  the  results.  Whether  or  not  there  be, 
somewhere  or  ever,  any  other  good  than  the  good  will, 
it  is  certain  that  there  can  be  nothing  ill  but  the  ill  will. 
Whatever  wrong  we  may  purpose,  and  however  great  the 
guilt  of  our  intent,  and  however  grievous  the  merited  punish- 
ment, there  can  never  anywhere  be  any  guilt  of  accomplish- 
ment. This  is  a  world  where  even  all  ill  is  good,  since  this 
is  a  world  ruled  by  infinite  goodness  :  "  God's  in  his  heaven." 

This  much  granted,  —  and  it  is  not  much  to  grant  for 
the  truly  religious  man  or  for  the  truly  religious  age,  —  it 
forthwith  becomes  incredible  that  the  best  interests  of  any 
of  us  can  antagonize  the  interests  of  the  others,  if  only  it  be 
possible  to  the  individual  to  appreciate  things  in  their  ulti- 
mate meanings  and  their  long  effects.  Somehow  each  of  us 
meets  the  faith  in  him  that,  could  he  see  things  farsightedly 
and  clearly,  self-love  and  fellow  love  would  find  themselves 
reconciled  in  the  moral  code  as  it  daily  enacts  itself  in  the 
human  conscience.  The  right  of  our  neighbor  can  hardly 
be  wrong  to  us.  The  claims  of  sympathy  and  the  demands 
of  duty  not  only  express  our  obligations  to  our  fellow  beings. 


512  THE  ECONOMICS  OF  ENTERPRISE 

but  sum  up  in  the  highest  and  truest  sense  our  own  well  being. 
Somehow  the  right  thing  must  be  the  best  thing  for  each 
of  us.  It  cannot  do  our  neighbor  wrong;  it  must  be  best 
for  him  as  well  as  for  us.  It  follows,  then — as,  for  example, 
Bastiat  argued — that  all  exchange  is  a  mutual  transfer  of 
services.  All  trade  is  good  ;  good  from  the  point  of  view  of 
the  traders  immediately  concerned,  and  good  for  all  the  rest. 
International  trade  especially  must  be  good  for  both  nations. 
Hence  a  further  corroboration  of  the  brave  and  noble  faith 
that  all  individual  interests,  rightly  seen,  must  harmonize ; 
any  clash  must  be  the  merest  seeming,  or  somehow  real  in- 
terests have  been  misconceived.  And  even  when  these  mis- 
conceivings  are  most  common  and  most  extreme,  the  Unseen 
Hand  will  always  —  or  almost  always,  or  commonly,  or  at 
all  events  sometimes  —  marvelously  and  providentially  set 
things  right.  It  was  odd,  no  doubt,  in  a  world  like  that  of 
Adam  Smith's  construction,  that  there  should  turn  out  to  be 
any  such  thing  as  unproductive  labor ;  and  particularly 
was  it  odd  that  traders  and  middlemen  should  so  multiply, 
being  mostly  parasitic.  But  at  any  rate  both  valets  and 
traders  could  be  trusted  to  become  gradually  fewer  —  a 
laggardly  and  leisurely  fulfillment  of  the  divine  will,  but  none 
the  less  a  fulfillment.  In  general,  surely,  private  gain  must 
accord  with  public  welfare.  Consumption  must  take  place 
by  right  of  a  preceding  production.  Private  gain  must  trace 
back  to  social  contribution.  Capital  must  be  such  by 
furtherance  of  social  product.  Private  income  connotes 
a  socially  earned  income.  Distribution  is  solely  and  ex- 
clusively a  division  of  a  joint  product  among  the  cooperating 
productive  factors.     So  runs  the  Great  Plan. 

Natural  laws  control.  —  Tenuous  and  unsubstantial  rather 
than  solidly  theoretical,  and  impersonal  and  illusive,  but 
none  the  less  real  and  objective  and  effective,  is  this  same 
doctrine  as  it  presents  itself  under  the  guise  and  sanction 
of  Natural  Law.  The  Natural  Law  philosophy  was  the 
skeptics'  way  of  saying  substantially  the  same  thing;  it 
was  the  old  faith  unitarianized.  Being,  moreover,  less  naive, 
it  was  less  intelligible,  and  thereby  less  open  to  attack. 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE     513 

And  it  had  the  usual  merit  of  vagueness  that  it  might  mean 
pretty  much  anything  —  little  or  much  or  nothing.  Better 
than  this,  also,  it  was  rational,  and  struck  hands  across  the 
ages  with  Greek  philosophy  and  with  Roman  jurisprudence. 
It  sounded  not  a  little  like  the  Law  of  Nations  and  breathed 
the  air  of  Platonic  idealism.  But,  best  of  all,  it  recognized 
and  proclaimed  a  great  stream  of  righteous  tendency  and 
great  reservoirs  of  compelling  force  making  for  the  good. 
God  or  no  God,  there  was  —  and  still  is  —  a  world  of  law 
wherein  truth  is  immortal.  Thus  the  right  is  destined  to 
ultimate  triumph  ;  and  progress  reigns  ;  and  things  essentially 
improve  by  their  own  inevitable  unfolding ;  and  the  soul 
of  things  is  just.  Evolution  is  thereby  the  last  word  of 
scientific  faith,  and  the  ameliorative  trend  a  popular  certi- 
tude. 

If,  indeed,  all  this  be  not  easy  to  state,  it  is  easy  enough  to 
feel  and  to  know,  as  most  economists  and  all  good  citizens 
do  now  know  it  and  feel  it.  All  things  are  coming  out  all 
right ;  the  situation  will  work  itself  clear ;  the  world  is 
getting  better ;  time  will  solve  the  perplexities  and  administer 
the  remedies ;  things  will  cure  themselves ;  destiny  guides 
us ;  the  long  laws  are  with  us ;  something  will  be  found  to 
replace  the  wasted  coal ;  the  hills  will  reforest  themselves 
somehow.  If  God  is  not  benevolent,  trends  and  forces  and 
tendencies  are.  Let  nobody  "  knock."  This  is  the  day 
of  the  optimist.  Whoever  doubts  declares  his  own  inca- 
pacity for  sane  thinking. 

Laissez  faire  political  science  —  It  must,  however,  be 
admitted  that  the  Laissez  Faire  school  of  thinking  was  some- 
thing more,  and  possibly  something  better,  than  a  mere 
spontaneous  religious  faith  or  a  naive  natural-law  meta- 
physics. Some  measure  of  inductive  support  was  com- 
mendably  offered  this  a-priori  faith,  and  therewith  a  plausible 
case  was  established.  The  economists  of  the  first  half  of 
the  nineteenth  century  were  engaged  in  the  study  of  societies 
emerging  from  centuries  of  kingship,  of  government  by  classes, 
of  stupid  and  unjust  legislation.  It  was  clear  enough  that 
the  progress  of  society  lay  in  the  breaking  down  of  legal 
2l 


514  THE  ECONOMICS  OF  ENTERPRISE 

barriers  and  limitations,  in  the  sweeping  away  of  the  privileges 
of  caste  and  class,  and  in  the  development  of  popular  in- 
stitutions under  the  form  of  local  and  individual  initiative. 
The  time  was  one  of  growth  and  advance.  A  wealth  of 
achievement  justified  the  advocates  of  industrial  liberty  as 
theorists  and  honored  them  as  prophets.  The  era  was  a 
series  of  object  lessons  in  the  blessings  of  untrammeled 
individual  activities  and  in  the  dangers  of  overlegislation  and 
paternalism.  The  benefits  of  increased  freedom  argued  for 
the  wider  abolition  of  regulation,  and  the  regime  of  liberty 
came  to  stand  as  the  ideal  toward  which  civilization  seemed 
to  tend.  For  most  cases,  it  was  manifest  that  what  indi- 
viduals and  peoples  chiefly  need  is  to  be  let  alone ;  that  that 
part  of  human  ill  is  small  which  kings  and  parliaments  can 
cure.  In  the  full  flood  of  hope,  economists  argued  learnedly 
that  the  good  of  each  is  always  and  inevitably  bound  up 
with  the  good  of  all ;  that  in  the  marvelous  divine  order  of 
things,  selfishness  of  motive  works  out  in  altruism  of  results ; 
that  social  ill-adjustments  are  due  to  too  little  liberty,  too 
much  meddling,  or  to  ill-informed  estimates  by  the  individ- 
ual of  his  owTi  interests.  Nothing  remained  but  to  enlighten 
the  people  in  their  freedom.  The  future  could  not  lie  with 
restraint,  but  with  liberty  informed  with  knowledge. 

Derivative  modern  doctrines.  —  This  brief  genealogical 
record  concerns  the  present  inquirj^  merely  as  indicating  the 
presuppositions,  and  as  sketching  the  background  of  thought, 
explanatory  of  certain  important  positions  in  current  eco- 
nomic theory.  These  are  :  In  ultimate  essence  competition 
is  voluntary  cooperation.  Capital  is  wealth  stored  up  for 
purposes  of  future  production  and  consists  solely  of  concrete 
instrumental  equipment.  The  test  by  which  a  thing  is 
capital  is  the  test  of  technological  serviceability  as  a  factor 
for  concrete  production  in  the  industrial  process.  The 
interests  of  labor  demand  the  multiplication  of  capital.  All 
incomes  are  derived  from  participation  in  the  productive 
process.  These  incomes,  as  distributive  shares  out  of  a  jointly 
produced  product  of  value,  are  received  by  title  of  social 
service  performed.    Distribution  is  part  and  parcel  of  the 


I 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     515 

productive  process,  takes  place  within  it,  and  is  justified  by  it. 
The  point  of  view  from  which  the  economic  life  is  to  be 
studied  and  by  which  it  is  to  be  interpreted  is  the  social  point 
of  view.  Each  and  every  gainful  occupation  approves  itself 
as  socially  productive,  else  it  could  not  normally  be  privately 
gainful. 

And  now  it  will  be  worth  while  to  subject  these  doctrines 
to  the  test  of  the  pitiless  facts.  But,  at  the  threshold  of  this 
unwelcome  task,  a  caution  is  called  for.  If  it  should  have 
occurred  to  the  thoughtful  reader  that  the  foregoing  equipment 
of  concepts  and  categories  and  doctrines  is  especially  reminis- 
cent of  the  current  productivity  school  of  distributive  theory, 
this  suggestion  must  be  promptly  dismissed.  Reminiscent 
of  the  productivity  school  it  may  in  some  sense  be,  but 
not  rightly  or  especially  or  peculiarly  so  ;  for  all  these  are  the 
concepts  and  categories  and  doctrines  of  current  economics  in 
general.  They  are  the  common  property  of  the  classical 
and  of  the  modern.  This  equipment  of  terms  and  theories 
and  presuppositions  is  the  common  possession  of  economic 
thought  in  the  large  —  not  of  this  school  or  the  other,  not  of 
ancient  or  of  modern,  not  of  cost  doctrinaires  or  of  utility 
doctrinaires,  but  of  the  genus  economist  in  general. 

Criticism  and  denial.  —  But  to  the  test  of  the  facts :  the 
truth  is  that  the  essential  nature  of  capital  is  not  to  be  found 
in  its  significance  as  a  category  of  machines  and  tools  and 
appliances.  True,  these  things  are  capital,  but  so  also  is  ice 
in  the  ice  house  waiting  for  summer,  cider  in  the  cask  aging 
to  vinegar,  wine  in  the  vault  acquiring  bouquet  and  flavor. 
Not  even  for  the  wine  or  for  the  cider  is  James  Mill's  explana- 
tion —  that  these  also  work  —  a  competent  account  of  their 
capital  character.  The  merchant's  stock  of  goods  is  capital, 
but  not  as  a  factor  of  production  in  any  industrial  or 
technological  process ;  and,  if  some  one  should  suggest  that 
these  are  merely  private,  not  social  capital,  the  answer  must 
be  :   precisely  so,  —  capital. 

Nor  is  the  test  in  the  materiality  of  the  product.  Freight 
wagons  or  freight  cars  are  surely  somehow  to  be  included 
within  the  capital  category;    then  so,  also,  are  passenger 


510  THE  ECONOMICS  OF  ENTERPRISE 

ears  and  taxieabs  —  despite  the  fact  that  they  are  rendering 
merely  the  serviee  of  transporting  men.  But  then  equally 
so  are  excursion  boats  or  pleasure  boats  kept  for  hire.  And 
not  the  less  so  are  the  houses  that  shelter  men  —  whether 
tenants  or  owTiers  —  and  the  land  which  upholds  the  houses. 

Nor  is  the  line  of  distinction  to  be  sought  by  reference 
to  the  wholesomeness  or  to  the  social  service  of  the  product. 
Economic  productivity  is  not  a  matter  of  piety  or  merit  or 
deserving,  but  only  of  commanding  a  price.  Not  a  few  of 
us,  like  a  late  friend  of  the  writer,  glance  back  over  our  lives 
to  wonder  why  everything  that  we  ever  really  liked  "  was 
either  extravagant  or  immoral  or  indigestible."  Actors, 
teachers,  preachers,  lawyers,  prostitutes,  all  do  things  that 
men  are  content  to  pay  for.  So  wages  may  be  earned  by 
inditing  libels  against  a  rival  candidate,  or  by  setting  fire 
to  a  competitor's  refinery,  or  by  sinking  spices. 

But  if  with  consumption  goods  neither  ethical  nor  social 
standards  are  theoretically  decisive,  or  even  relevant,  for 
the  question  of  value  and  marketability  and  economic  pro- 
ductivity, so  likewise  are  these  tests  equally  inappropriate 
for  the  capital  question.  If  whisky  is  wealth,  distilleries  are 
capital  items.  If  Peruna  is  wealth,  the  kettle  in  which  it  is 
brewed  must  be  accepted  as  capital.  Then  so  is  the  house 
rented  as  a  dive  —  the  equipment  of  the  gambler  and  the 
saloon  keeper,  the  building  and  fittings  of  the  indecent  stage. 

And  now  note,  for  the  larger  and  more  general  purposes  of 
the  argument,  that  if  all  these,  as  gain  rendering  to  their 
owners,  are  capital,  so  also  must  the  inmates  of  the  dive 
be  recognized  as  producers  after  their  kind  —  along  with 
the  poor  actor,  the  vaudeville  performer,  and  the  chorus 
or  ballet  girl.  The  test  of  social  welfare  or  of  artistic  merit 
is  invalid  to  stamp  as  unproductive  any  form  of  wealth  or 
any  kind  of  labor.  Ask  only  whether  it  sells  or  pays.  If 
jimmies  are  capital,  being  productive  for  their  purpose,  so 
also  is  burglary  productive  ;  if  sand  bags,  so  highway  robbery. 
The  principle  decisive  for  gambler's  quarters  and  for  gambling 
appliances  holds  for  gambling.  If  the  fees  which  the  lawyer 
receives  for  pleading  and  winning  an  unjust  cause  are  earned, 
so  also  are  the  daily  receipts  of  the  beggar  upon  the  corner. 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     517 

Lobbyists,  panders,  and  abortionists  are  producers  :  that  they 
are  paid  is  the  adequate  proof.  This  is  surely  not  to  deny 
the  fact  of  parasitism  in  society.  But  parasitism  is  not  a 
competitive  category,  however  far  it  may  be  a  competitive 
phenomenon ;  it  is  a  concept  irrelevant  to  competitive 
analyses  and  competitive  doctrine.  It  has  its  place  only 
when  the  facts  are  to  be  appraised  in  their  social  significance. 
It  belongs  to  the  art  of  economics  rather  than  to  the  science. 
It  has  no  bearing  to  determine  what  is  or  is  not  capital. 

A  new  point  of  view.  —  It  is,  indeed,  superlatively  impor- 
tant, here  and  everywhere,  to  recognize  that  a  complete 
acceptance  of  this  private  and  acquisitive  point  of  view  is 
the  only  procedure  possible,  in  the  analysis  and  classification 
of  the  phenomena  of  a  society  organized  upon  lines  of  in- 
dividual activity  for  private  gain.  This  is  abundantly  proved 
as  soon  as  appeal  is  made  to  the  facts  and  the  processes  of 
the  actual  business  world.  In  the  computation  of  competi- 
tive entrepreneur  costs,  the  capital  investment  and  the 
interest  charge  are  reckoned  upon  a  basis  quite  other  than 
that  of  technological  capital.  Entrepreneur  capital  — 
capital  in  the  guise  in  which  the  type  form  of  modern  busi- 
ness, the  corporation,  presents  it  —  includes  not  merely 
consumption  goods  in  stock,  but  banking  balances,  counter- 
money,  funds  tied  up  in  customers'  accounts  and  in  bills 
receivable  of  many  varieties,  corporate  stock  and  securities, 
whether  held  for  sale  or  for  investment,  and  generally  all 
that  fund  of  working  capital,  more  or  less  unspecialized, 
requisite  to  the  successful  functioning  of  a  business.  The 
manufacturing  entrepreneur  or  the  corporation  manager 
would  find  it  a  novel  and  perplexing  doctrine  which  should 
restrict  the  capital  investment  to  the  buildings,  machinery, 
and  raw  materials  of  the  undertaking.  The  corporation 
really  possesses  nothing  that  is  not  capital.  All  things, 
then,  that  can  be  traded  in,  or  valued,  or  rented,  or  capital- 
ized may  fall  within  the  meaning  of  the  capital  concept. 
In  this  sense  of  the  term  capital  includes,  in  the  price  aspect, 
patents,  copyrights,  trade-marks,  business  connections, 
reputation,  good  will,  privilege,  government  favor,  franchises, 


518  THE  ECONOMICS  OF  ENTERPRISE 

royalties,  rights  of  toll  and  tribute,  rents,  annuities,  mort- 
gage rights,  personal  claims.  And,  further,  it  includes 
monopolies  of  no  matter  how  various  kinds  and  degrees,  so 
far  as  they  may  become  the  subject  of  invested  cost  in  ob- 
taining them,  so  far  as  they  are  bought  and  sold  as  steps  in 
competitive-productive  investment,  or  are  vendible  upon 
the  market  as  capitalized  dividend-paying  properties.  All 
of  these  are  capital  for  our  present  purposes,  since  they  get 
into  costs  in  the  actual  competitive  market  production  of 
such  commodities  —  hats,  wheat,  machinery,  stocks,  etc. 
—  as  are  actually  marketed.  All  things  which,  from  the 
entrepreneur  point  of  view,  appear  as  expedient  expenditure 
for  the  purposes  of  creating  either  a  commodity  or  a  situa- 
tion of  market  value  are  outlays  of  capital  taldng  rank  as 
costs  of  production.  When  the  purchase  of  machinery  is 
an  advisable  move  in  business  policy,  capital  goes  into  it, 
as  at  another  time  into  land  or  labor.  When,  in  good  busi- 
ness policy,  a  franchise  must  be  had  or  a  patent  procured, 
capital  is,  in  either  case,  so  directed  as  to  accomplish  the 
necessary  thing.  When,  for  equally  cogent  business  reasons, 
legislatures  or  city  councils  must  be  bought,  the  necessary 
outlays  are,  for  cost  and  value  purposes,  precisely  like  ex- 
penditures for  machinery  or  for  the  control  of  patented  pro- 
cesses. Tramway  franchises  and  sugar-refining  tariffs,  as 
situations  business-wise  obtained  by  the  expenditure  of 
capital,  disclose  in  the  current  market  values  of  the  stock 
the  present  worth  of  the  forecasted  gains.  So  the  expenses 
of  stifling  competition  are  capital  outlays,  invested  as  the 
costs  of  a  monopoly  to  be  obtained ;  so  also  the  tribute  paid 
to  escape  cutthroat  competition  is  a  capital  cost  of  pro- 
duction. 

Fact  and  description  versus  appreciation  and  appraisal.  — 
All  this  should  be  easy  of  acceptance,  but  is  in  fact  far  from 
easy.  Social  appraisals  are  prone  to  disturb  and  to  confuse 
all  purely  realistic  descriptions  and  theoretical  analyses  of 
the  facts  of  actual  business.  What  should  be,  gets  mixed 
with  what  actually  is.  The  case  is  as  if  the  physician,  be- 
cause he  ought  to  be  sympathetic,  were  required  to  mix 
his  hopes  into  his  diagnoses  and  to  write  his  sympathies 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE      519 

into  his  prescriptions.  One  may  condemn  the  poisoner's 
art,  but  this  ought  to  argue  that  the  chemist  study  poisons 
carefully  rather  than  that  he  exclude  them  from  his  researches. 
Bacteriology  would  be  of  dubious  service  to  human  life  if 
only  beneficent  bacteria  were  held  worthy  of  attention. 
The  zoologist  who  could  not  see  a  snake  would  be  a  twin 
brother  to  the  economist  who  can  find  capital  only  when  there 
is  social  productivity,  and  who  recognizes  economic  labor 
and  economic  wages  only  upon  condition  of  social  deserving. 
Economists  will  do  well  forthwith  to  recognize  that  rights 
of  patent  and  royalty  are  capital ;  that  rights  of  tribute 
through  franchise  privileges  are  capital ;  that  police  permits 
to  rob  passers-by  after  midnight  are  capital ;  that  legislative 
authority  to  rob  importers,  both  early  and  late,  is  capital ; 
that  royal  patents  for  tax-farming  the  peasantry  are  capital ; 
and  that  generally  every  property  basis  of  private  acquisi- 
tion is  by  that  very  fact  capital.  Until  Political  Economy 
has  achieved  this  much  of  wisdom,  its  doctrines  can  express 
nothing  more  than  a  pious  and  commendable  aspiration ; 
it  will  still  be  busy  with  picturing  utopias  or  with  analyzing 
hypotheses ;  on  this  basis  it  must  continue  to  lack  all  touch 
with  life,  to  make  itself  a  sheer  farce  —  albeit  coming  as 
near  to  tragedy  as  comedy  often  gets. 

The  present  economic  situation.  —  Time  more  than  enough 
has  already  been  spent  in  presenting  and  repeating  these 
doctrinal  axioms.  The  application  of  them  to  our  actual 
American  society  may  now  properly  occupy  our  attention : 

A  great  part  of  the  120  billions  of  American  wealth  — 
as  the  statisticians  report  it — is  made  up  of  one  form  or 
another  of  capitalized  privilege  or  of  capitalized  predation. 
If,  indeed,  our  computations  include  all  forms  and  mani- 
festations of  private  claim  and  of  private  property  in  that 
to  which  no  individual  could  originally  have  made  good  his 
private  right  of  enjoyment,  it  is  probably  not  going  too  far 
to  assert  that  two  thirds  of  the  durable  private  bases  of 
income  in  the  United  States  are  nothing  else  than  this  capi- 
talization of  privilege  or  of  predation.  The  market  value  of 
these  nonsocial  or  antisocial    forms   of   private    capital    is 


520  THE  ECONOMICS  OF  ENTERPRISE 

merely  the  present  worth  of  the  right  to  extract  tribute  from 
one's  fellows  or  to  plunder  one's  fellows.  This  fraction  is 
placed  at  two  thirds  as  admittedly  an  estimate.  But,  as  an 
estimate,  it  is  easily  made  credible : 

Note  the  facts  as  reported  by  the  1904  census  :  Out  of  the 
107  billions  of  material  wealth,  18|  billions  are  reported  as 
current  products  —  clothing,  personal  ornaments,  furniture, 
carriages.  Of  the  remaining  89  billions,  2  billions  are  coin 
and  bullion.  Of  the  remaining  87  billions,  62  billions  are 
land  and  improvements  and  16  billions  are  accounted  for  as 
public  utility  corporations ;  8  billions  remain  for  live  stock 
and  industrial  equipment.  Our  problem  has,  then,  mostly 
to  do  with  these  87  billions  of  social  equipment  —  income- 
earning  wealth  in  the  ordinary  sense.  We  find  this  total 
to  divide  into  : 

8  billions  of  non-transportation  equipment 

16  billions  of  public  utility  wealth 

62  billions  of  land  and  improvements. 
How  much,  then,  of  this  87  billions  of  wealth  is  the  capitalized 
bounty  of  nature  or  the  capitalized  expectation  of  unearned 
dividends  ? 

Recalling  that  mines  and  water  powers  are  included  within 
the  land  category,  that  the  ground  values  in  cities  like  New 
York  and  Chicago  are  twice  the  improvement  values,  that 
four  fifths  of  the  farm  values  are  land  values,  that  seven 
twelfths  of  the  real  estate  values  for  a  group  of  states  not 
including  New  York,  Massachusetts,  Illinois,  and  Pennsyl- 
vania are  ground  values,  that  the  last  tax  report  for  Illinois 
gives  the  town  and  city  lots  as  assessed  at  twenty-four  times 
the  farm  values  —  it  is  probably  conservative  to  say  that 
over  two  thirds  of  the  real  estate  wealth  of  the  country  is  in 
ground  values.     Here  are  41  billions  of  unearned  increment. 

Estimating,  also,  the  value  of  rights  of  way,  of  user  and  of 
terminals,  for  the  railroads  and  tramways,  express  companies, 
telephone,  electric  light,  and  telegraph  companies,  it  is  prob- 
ably not  wide  of  the  truth  to  say  that  one  half  of  the  18  bil- 
lion value  of  public  service  corporations  represents  merely 
social  values.  If  there  is  overstatement  here,  it  surely  does 
not  offset  the  liberality  in  the  division  of  real  estate  values. 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE      521 

Here,  then,  are  approximately  50  billions  of  unearned  values 
out  of  a  total  of  87  billions.  Five  ninths  of  the  durable  wealth 
reported  by  the  census  is  made  up  of  privately  appropriated 
social  wealth. 

The  difficulty  is,  however,  that  the  census  returns  have  been 
constructed  upon  the  basis  of  a  viciously  bad  concept  of 
capital.  In  the  main,  the  totals  represent  a  valuation  of 
material  tangible  items  of  goods  or  of  equipment.  But  as 
a  question  not  of  social  wealth,  but  of  the  aggregate  of  private 
competitive  wealth,  the  interrelations  of  human  beings  must 
be  considered.  If  half  the  population  of  America  became 
slaves,  50  billions  of  wealth  might  forthwith  be  added  to  the 
wealth  aggregate.  In  the  mere  item  of  public  debts  we  have 
approximately  3  billions  to  be  computed  as  private  wealth 
against  which  no  debit  can  be  charged  in  the  aggregate  ap- 
praisal. These  debts  are  merely  the  present  worth  of  the  pri- 
vate rights  of  some  men  to  collect  future  taxes  out  of  other  men. 
Patents  and  franchises  and  privileges  are  all  fundamentally 
of  this  same  sort.  In  a  general  way,  the  common  stocks  of 
the  later  corporations  are  nothing  more  or  less  than  the  pres- 
ent worth  of  putative  future  dividends  resting  upon  no  basis 
of  original  investment.  The  Steel  Corporation  with  its 
billion  dollars  of  market  value  rests  upon  original  properties 
of  from  200  to  300  millions.  The  average  earnings  of  100 
millions  would  support  a  valuation  of  2  billions  if  only  it  were 
certain  that  this  robbery  can  have  no  end.  The  dividend- 
earning  capacity  of  the  Booth  Company  supports  a  capi- 
talization double  that  of  its  material  assets.  Sears,  Roebuck 
and  Company  incorporated  approximately  9  millions  of 
tangible  assets  into  9  millions  of  preferred  stock  and  30 
millions  of  common  stock :  and  this  common  stock  is  now 
selling  at  200  —  seventy  millions  of  private  wealth  against 
10  millions  of  social  wealth.  Immunity  from  competition 
through  protective  tariffs,  through  combination,  through 
franchises,  and  through  patented  processes,  explains  a  vast 
total  of  private  wealth  of  which  the  census  takes  practically 
no  account.  Even  the  item  of  good  will  —  a  property  claim 
not  necessarily  predatory  in  its  basis  —  means  commonly 


522  THE  ECONOMICS  OF  ENTERPRISE 

nothing  more  than  the  special  ability  of  some  particular 
corporation,  for  example,  Sears,  Roebuck  and  Company,  to 
avoid  the  wastes  of  our  i)revailing  system  of  retail  merchandis- 
ing. One  may  conjecture  —  or  guess  —  the  aggregate  pri- 
vate wealth  of  the  country  to  be  150  billions  of  dollars,  and 
may  hazard  the  estimate  that  the  20  billions  of  real  estate 
improvements,  10  billions  of  public  utilities  property,  20 
billions  of  tangible  personal  property  and  of  goods  for  con- 
sumption —  a  total  of  50  billions  —  more  than  represent 
the  earned  wealth  of  the  country  as  against  a  total  private 
wealth  three  times  as  great.  How  much  of  what  earned 
wealth  there  is  is  now  in  the  hands  of  those  who  did  not  earn 
it  is  still  another  question. 

The  purpose  here  is  not  primarily  to  show  how  tragically 
inadequate  is  the  single  tax  program  interpreted  as  applying 
solely  to  unearned  increments  of  land.  So  far  at  least  as  the 
single  taxers  go,  they  emphasize  a  real  evil.  Nor  is  it  a  valid 
objection  to  their  proposed  remedy  that  there  are  other 
iniquities  even  more  seriously  demanding  attention.  Nor  is 
there  time  at  present  to  point  out  how  unworkable  is  the 
single  tax  program,  so  far  as  it  intends  an  appropriation  of 
unearned  increment  through  the  machinery  of  the  ad-valorem 
tax.  Nor  is  it  possible  here  to  do  more  than  to  call  to  mind 
the  diminishing  significance  of  these  agricultural  rents  as 
over  against  the  stupendously  increasing  importance  of 
urban  rents.  (See  Chap.  XIII.)  The  land  rent  problem 
is  not  a  problem  of  diminishing  inportance,  but  of  enor- 
mously increasing  importance  —  all  on  the  urban  side.  The 
assessed  value  of  the  ordinary  real  estate  of  Manhattan 
Island  —  two  thirds  of  which  has  been  shown  to  be  ground 
value  —  exceeds  by  ^900,000,000  the  assessed  value  of  all 
ordinary  real  estate  in  the  United  States,  urban  and  rural, 
west  of  the  Mississippi  River,  inclusive  of  Minnesota  and 
Louisiana.^ 

Nor  is  the  purpose  —  here  or  elsewhere  —  the  inditing  of 
any  sort  of  socialistic  screed,  but  simply  to  point  out  the 

1  Report  of  Com.  of  Taxes  and  Assessments  of  the  City  of  New 
York  in  1907. 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     523 

significance  of  the  unearned  increment  of  land  or  of  privilege 
in  its  bearing  upon  tiie  present  distribution  of  wealth  and 
of  poverty.  Were  society  later  to  make  as  great  a  botch  of 
socialism  as  it  has  thus  far  made  of  competition,  socialism 
would  present  the  nightmare  of  all  the  ages.  The  present 
quest  is  to  get  to  the  heart  of  the  growing  poverty  of  some 
part  of  our  present  population  —  to  point  out,  for  example, 
why  the  wage-earning  classes  of  our  cities  are  finding  it 
increasingly  difficult  to  get  meat  to  eat,  and  why,  with  the 
more  unskilled  of  these,  the  Italians,  for  example,  it  is  no 
longer  possible  for  the  wife  and  the  wage-earning  girls  and 
the  children  to  have  any  meat  at  all.  And  about  all  that 
can  at  present  be  done  for  the  problem  is  to  get  it  stated  and 
to  get  its  terms  into  the  proper  theoretical  relation  to  the 
notions  of  competitive  gain  and  competitive  income  and  to 
a  really  modern  and  workable  concept  of  capital. 

For  we  are  to  remember  that,  side  by  side  with  the  want  of 
the  poor,  our  average  standard  of  living  is  rising.  We  are 
to  remember,  also,  that  we  are  the  richest  nation  of  the  world 
—  not  merely  as  measured  by  the  colossal  wealth  of  our  very 
rich ;  not  merely  by  the  flamboyant  expenditure  and  the 
crass  ostentation  of  our  great  spenders ;  not  merely,  also, 
by  the  sheer  commonplaceness  of  great  personal  incomes 
and  great  property  incomes  —  but  also  by  the  test  of  an 
extraordinarily  high  per  capita  productivity  of  consumable 
wealth. 

The  truth  is  that  no  nation  of  the  world  out  of  all  the  past 
and  no  other  nation  of  the  present  can  rank  with  present 
America  either  in  opportunities  or  in  accomplishment  in 
wealth  production.  The  average  per  capita  product  depends 
in  part  upon  the  quality  of  the  human  being  and  in  part 
upon  the  quality  of  his  environment.  As  speed  in  running  is 
partly  a  matter  of  the  runner  and  partly  of  the  track,  so  the 
productive  output  is  explained  partly  by  the  quality  of  the 
farmer  and  partly  by  the  quality  of  his  farm. 

All  this  is  merely  one  application  of  the  great  law  of  corre- 
spondence, the  interplay  between  organism  and  environment. 
There  are  only  these  two  ultimate  forces  in  economic  his- 


524  THE  ECONOMICS  OF  ENTERPRISE 

tory,  man  and  nature.  If  the  Chinese  have  less  per  capita 
to  consume  than  the  French,  it  is  because  the  Chinese  produce 
less  per  capita.  And  the  expkmation  for  this  must  be  found 
in  the  lower  skill  or  vigor  or  energy  or  intelligence  or  scientific 
attainments  of  the  Chinese,  or  in  the  crowded  or  otherwise 
unfavorable  character  of  the  habitat.  If  Americans  live 
better  than  Europeans,  it  must  be  that  the  Americans  are 
better  producers  —  more  active,  more  inventive,  more 
enterprising  —  or  that  the  soil  and  climate  and  other  natural 
resources  of  America  offer  more  favorable  opportunities. 
(See  Chap.  I.) 

It  is  obvious  that  it  is  chiefly  in  intellectual  power  and  in- 
tellectual acquirement  that  the  modern  man  surpasses  his 
progenitors  in  productive  output.  If  we  compare  the  modern 
industrial  process  with  the  methods  of  ancient  times,  we  get 
some  notion  of  the  importance  of  science  and  art  in  produc- 
tion. Precisely  here  was  the  significance  of  the  agricultural 
and  industrial  revolutions.  Man  has  harnessed  to  his  aid 
the  forces  of  nature ;  has  made  levers  out  of  the  elemental 
energies.  It  is  the  chemist  that  grows  most  corn.  Steam 
and  electricity,  the  printing  press,  the  cotton  gin,  these  are  our 
free  inheritance  —  excepting,  of  course,  when  even  the  field  of 
scientific  knowledge  has  been  surveyed  off  into  private  hold- 
ings of  patent  and  royalty.  Even  the  dissemination  of 
knowledge  now  divides  its  maximum  toll  between  the  paper 
trust  and  the  tyi3e  foundry  association. 

The  highest  product  of  modern  science  is  in  the  industrial 
technique  at  the  disposal  of  the  modern  man  as  productive 
agent.  As  most  completely  master  of  this  technique,  most 
intelligent  in  its  application,  most  industrious,  most  enter- 
prising, and  most  aggressive  in  its  utilization,  the  Anglo- 
Saxon  has  made  himself  the  leader  in  the  industrial  society 
of  the  new  industrial  era. 

Consider  all  that  this  means  for  the  American  branch  of  the 
Anglo-Saxon  race.  Other  nations  have  tediously  worked  out 
the  problems  of  progress  handicapped  bj^  their  own  inefficiency, 
under  the  harsh  pressure  of  the  subsistence  limit,  in  environ- 
ments either  niggardly  in  the  beginning  or  crowded  by  ex- 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     525 

panding  population  and  exhausted  by  improvident  use. 
Out  of  this  long  poverty  there  has  finally  emerged  the  modern 
civilization.  And  in  these  last  days,  equipped  with  all  this 
racial  heritage  of  technique,  vigorous,  energetic,  and  effective 
beyond  all  competing  races,  the  Anglo-Saxon  is  now  exploit- 
ing the  almost  inexhaustible  wealth  of  the  richest  continent 
in  the  world  —  forests  ready  grown  to  his  hand,  limitless 
expanses  of  the  most  fertile  land  of  the  world  cleared  and 
ready  for  his  plow,  silver  and  gold  in  unexampled  wealth, 
the  main  copper  resources  of  the  world,  iron  as  dust  to  be 
shoveled  from  the  surface  of  the  earth,  two  thirds  of  the 
known  coal  resources  of  the  world,  and  all,  or  nearly  all,  of 
the  natural  gas  and  of  the  petroleum.  America  actually 
produces  three  fourths  of  the  maize  of  the  world,  more 
wheat  than  any  other  country,  one  third  of  the  oats,  two 
thirds  of  the  cotton,  one  half  of  the  iron,  one  fourth  of  the 
gold,  three  sevenths  of  the  lead,  two  fifths  of  the  coal  (and, 
exclusive  of  the  United  Kingdom,  more  than  all  the  rest  of 
the  world  combined),  three  fifths  of  the  copper,  one  third 
of  the  zinc,  three  eighths  of  the  aluminum. 

That  the  fertility  of  the  soil  is  being  seriously  depleted, 
the  forests  nearing  exhaustion,  the  gas  already  nearly  gone, 
the  coal  in  prospect  of  exhaustion  in  150  years,  and  the 
artesian  water  beginning  to  fail,  does  not  matter  to  the  prob- 
lem. Nor  does  it  concern  the  present  analysis  that  every 
great  white  way  in  every  American  city  is  nightly  one  more 
chemical  orgy  of  waste,  a  crime  of  competitive  advertising, 
for  which  some  day  hundreds  of  human  beings  must  shiver 
for  months.  Our  enormous  production  still  goes  on.  It 
ought  to  represent  itself  in  a  generally  high  level  of  consump- 
tion among  the  wage  earners.  Instead  of  this,  however, 
a  goodly  percentage  of  our  laborers  are  close  to  the  margin 
of  starvation. 

It  is,  indeed,  an  extraordinary  outburst  of  productive 
achievement  which  we  are  witnessing  —  a  combination  of 
productive  efficiency  with  favorable  opportunity  never 
paralleled  in  the  past  history  of  the  race,  and  never  to  be  dupli- 
cated again  in  all  the  years  of  the  long  future.    No  new  con- 


526  THE  ECONOMICS  OF  ENTERPRISE 

tinent  is   loft  to  be  opened.     Modern  science  and  virgin 
opportunity  can  never  again  concur. 

But  botli  tlie  science  and  the  opportunity  are  still  with  us ; 
and  the  fabulously  generous  product  derivative  from  these 
is  still  with  us ;  and  yet  there  is  dire  poverty  for  hordes  of 
hard-working  men.  For  this  poverty  of  income  with  the 
poor  there  is  only  one  possible  line  of  explanation,  the  prod- 
igal incomes  of  the  rich.  We  are  to  recognize  that,  as  there 
are  incomes  w^hich  are  earned  by  contribution  to  the  satis- 
faction of  human  desires,  wise  and  unwise,  there  are  other 
incomes  which,  though  socially  earned,  are  not  earned  by 
their  recipients  :  and  that  there  are  still  other  incomes  which 
are  obtained  through  making  the  general  income  the  smaller 
—  so  much  the  more  as  there  is  for  the  one  individual,  there 
is  the  less  for  all.  As  Professor  Carver  has  put  it,  incomes 
are  of  three  sorts,  "  earnings,  findings,  and  stealings."  The 
stranger  is  it  that  as  theorist  he  has  not  carried  over  —  but 
has  rather  denied  —  these  same  distinctions  in  their  appli- 
cations to  the  notions  of  capital  and  of  income.  For  it  is 
clear  that  in  one  respect  the  prostitute  has  the  advantage 
of  the  receiver  of  ground  rent,  and  still  more  of  the  monop- 
olist, that  she,  at  least,  renders  a  quid-pro-quo  for  what  she 
receives,  while  neither  of  the  others  does. 

These  different  cases  of  property  income,  iniquitous  in 
origin  and  productive  of  innumerable  abominations,  divide 
for  present  purposes  into  three  classes : 

1.  Cases  where  rent  is  collected  upon  a  really  productive 
item  of  property;  w^here,  therefore,  the  only  question  is  as 
to  the  right  of  receipt  of  the  income :  capitalized  bounty  of 
nature. 

2.  Cases  like  franchises,  where  social  productivity  is 
absent,  but  where  rent  to  somebody  is  inevitable  unless 
portions  of  the  traflEic  are  deliberately  made  unprofitable. 
No  competitive  extension  of  the  traffic  is  practicable  to  cancel 
the  rent :   capitalized  privilege. 

3.  Cases  where  profits  express  not  merely  the  lack  of  social 
productivity,  but  an  interference  wdth  social  productivity 
through  the  restriction  of  product  or  the  deterioration  of 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     527 

product.  These  are  not  cases  of  a  bad  distribution  of  a  social 
product,  but  of  incomes  dependent  directly  upon  the  degree 
in  which  social  productivity  is  prevented :  capitalized 
predation. 

The  single  taxer  is  thus  fundamentally  right  in  his  declara- 
tion that  public  revenues  should  be  derived  so  far  as  is  possible 
from  the  social  estates  —  from  incomes  not  due  to  individual 
effort  in  the  production  of  social  service.  Any  system  of 
taxation,  no  matter  how  scientific,  is  yet  bad  which  has  not 
first  exhausted  these  sources  of  income  before  taxing  any 
other. 

But  our  present  system  is  bad  even  without  reference  to 
this  limitation.  So  far  from  taxing  unjustifiable  incomes 
equally  with  the  justifiable,  it  places  most  of  the  burden  upon 
the  justifiable  and  exempts  the  unjustifiable.  The  difficulty 
is,  then,  not  merely  that  15  billion  dollars'  worth  of  agri- 
cultural land  has  become  private  property,  on  which  the 
millions  of  disinherited  must  pay  rent  and  by  virtue  of  which 
they  become  "  trespassers  in  the  land  of  their  birth  " ;  not 
merely,  also,  that  untold  millions  of  dollars  in  urban  sites  are 
now  the  source  of  landlord  income  ;  not  merely  that  the  coal 
mines  belong  to  the  coal  barons,  the  copper  to  the  senators, 
and  the  gold  and  silver  mines  to  the  other  rich,  the  water 
powers  to  the  syndicates ;  not  merely  that  all  sorts  of  fran- 
chises have  fallen  into  private  ownership,  appropriating 
gains  that  should  be  social,  and  at  the  same  time  imposing 
monopolistic  restrictions  of  product  and  exactions  of  tribute, 
—  but  also  that  our  tax  system  is  directly  adapted  to  aggra- 
vate all  of  these  evils.  In  the  main  the  revenues  are  collected 
upon  the  consumption  of  the  incomes  of  those  very  classes 
that  have  been  already  grossly  exploited  in  the  distribution 
of  those  incomes.  The  poor  are  plundered  as  producers  by 
monopolistic  restrictions  on  production,  and  then  are  plun- 
dered again  as  consumers  through  consumption  taxes  upon 
that  which  has  been  produced.  Wages  that  are  inadequate 
at  the  best  buy  still  less  through  the  consumption  taxes  to 
which  these  wages  are  subjected.  If,  in  truth,  then,  we 
either  can  not  or  will  not  disturb  the  vested  rights  already 


528  THE  ECONOMICS   OF  ENTERPRISE 

accrued  in  land  wealth,  and  if  we  will  not  appropriate  or 
cancel  the  franchise  rents,  and  if  we  will  not  or  dare  not 
burden,  by  progressive  taxation  of  some  sort,  the  exercise 
of  exploitation  and  the  colhu'tion  of  tribute  —  if,  that  is  to 
say,  we  have  turned  over  even  the  tax  function  to  private 
ownership  —  we  might  at  least  experiment  awhile  with 
serious  inheritance  taxes.  The  pressing  problem  is  to  estab- 
lish equality  of  opportunity  —  the  elimination  of  handicaps. 
If  society  is  to  remain  democratic  politically,  it  must  be 
democratic  economically  and  socially. 

Theneed  of  anew  economics. — But  it  is  no  part  of  the  main 
purpose  of  this  volume  to  discuss  the  shortcomings  of  the 
competitive  order  in  its  present  working,  or  to  indicate  the 
lines  of  necessary  reform,  or  to  attack  or  defend  the  com- 
petitive principle  either  in  its  present  manifestations  or  in 
some  probable  better  future.  The  purpose  has  been  solely 
to  outline  the  theoretical  categories  which  the  actual  facts 
of  current  production  and  distribution  require  and  impose. 
Every  art  must  have  its  corresponding  science,  or  both  must 
suffer.  It  is,  then,  for  some  one  to  construct  an  economic 
science  adapted  not  only  to  the  requirements  of  the  facts,  but 
to  the  needs  of  their  amelioration.  To  this  end  Economics 
must  cease  to  be  a  system  of  apologetics,  the  creed  of  the 
reactionary,  a  defense  of  privilege,  a  social  soothing  sirup, 
a  smug  pronouncement  of  the  righteousness  of  whatever  is  — 
with  the  still  more  disastrous  corollary  of  the  unrighteous- 
ness of  whatever  is  not.  The  facts  which  are,  and  the  facts 
which  are  to  be,  are  equally  in  need  of  economic  categories 
to  fit  them.  If  the  program  of  social  progress  does  not 
harmonize  with  the  existing  economic  science,  something  is 
the  matter  with  one  or  with  both.  It  is  in  the  conviction 
that  the  fault  is  with  the  Economics  that  this  book  has  been 
written.  Its  aim  has  been  to  furnish  to  progressive  social 
workers  that  ultimate  basis  in  economic  theory  which  is 
theirs  by  right  of  truth. 

We  economists  must,  then,  come  to  recognize  that  we  have 
not  rightly  analyzed  the  notion  of  capital  and  have  wrongly 
interpreted  the  question-begging  term  productive  in  economic 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     529 

affairs.  We  have  assumed  that  private  gain  and  social 
welfare  are  approximately  interchangeable  concepts.  As  we 
have  failed  to  see  that  some  profits  and  some  wages  are  mere 
predation,  so  we  have  failed  to  recognize  that  some  of  the 
capital  is  as  iniquitous  and  disastrous  for  social  welfare  as 
other  of  the  capital  is  beneficent.  Noting  that  some  of 
it  is  good,  we  have  inferred  that  all  of  it  is  good.  By  our  bad 
analysis,  in  our  blindness  to  the  distinction  between  social 
productivity  and  private  productivity,  between  that  which 
ethically  is  production  and  that  which  ethically  is  predation, 
we  have  allowed  ourselves  to  stand  —  and  mostly  we  have 
stood  —  as  defenders  of  all. 

And  blind  to  this  same  distinction  we  have,  for  example, 
advised,  wherever  we  have  finally  become  conscious  that 
iniquity  has  become  capitalized,  that  this  sort  of  capital  be 
subjected  to  no  greater  rates  of  burden  than  apply  to  right- 
eous sorts  of  capital.  To  the  extent  that  we  favor  the  general 
property  tax  at  all,  we  favor  taxing  all  property  at  one  rate. 
We  shall,  possibly,  some  day  come  to  see  that  capital  in  a 
competitive  society  is  merely  a  source  of  private  gain,  and 
that  private  possession  may  attach  to  everything  that  is 
permitted,  legally  or  illegally,  to  render  gain  to  the  owner. 

In  that  good,  and  possibly  far-off  day,  we  shall  have 
ceased  to  believe  and  to  teach  that  price  expresses  either  the 
marginal  pain  of  production  or  the  marginal  utility  of  con- 
sumption ;  or  that  price  expresses  the  social  pain  cost  or  the 
social  utility  of  goods,  or  both  together — for  example,  that, 
since  the  dollars  paid  by  the  wearer  of  artificial  flowers  or  of 
pearls  are  the  same  dollars  received  by  the  flower  girl  or  by 
the  pearl  diver,  these  dollars  must  express  an  equality  be- 
tween hardship  on  the  one  side  and  joy  on  the  other ;  that 
units  of  capital  are  units  of  stored-up  outlay  of  labor  pain, 
and  that  interest  is  therefore  both  indirect  wages  and  in- 
direct and  proportionate  reward  for  labor  pain ;  that  the 
reward  for  capital  is  further  justified  on  the  one  side  by  the 
painful  abstinence  of  the  capitalist  and  on  the  other  side  by 
the  social  service  which  the  capital  renders ;  that  capital  is 
thus  a  homogeneous  fund  of  serviceability  to  human  welfare ; 
2m 


530  THE  ECONOMICS  OF  ENTERPRISE 

that  distribution  everywhere  tends  to  conform  to  deserving  — 
all  compotitivo  gain  being;  righteous,  and  all  incomes  suffi- 
ciently certifying  their  merit  by  their  receipt ;  that  land  rents 
have  no  part  with  other  costs  in  fixing  the  prices  that  com- 
sumers  must  pay ;  and  that  since  these  lands  harmlessly 
earn  their  rents,  the  rents  from  them  may  rightly  go  to  pri- 
vate owners. 

When,  in  short,  we  have  changed  our  calling  from  the 
painting  of  Utopias  and  the  capitalizing  of  dreams,  and  have, 
as  scientists,  brought  ourselves  somehow  into  touch  with 
fact,  the  prosperous  may  no  longer  deride  us  or  the  disin- 
herited curse.  There  will  need  be  no  laughing  then  any- 
where, and  if  there  be  cursing,  it  will  have  changed  its  source.^ 

^  Writing  in  1852,  John  Stuart  Mill  said  that  if  choice  were  to 
be  made  between  Socialism  and  the  existing  state  of  society  —  "if 
the  institution  of  private  property  necessarily  carried  with  it  as  a 
consequence  that  the  produce  of  labor  should  be  apportioned  as 
we  now  see  it  "  —  then  all  the  difficulties  of  Socialism  "  would  be 
but  as  dust  in  the  balance." 

Private  property,  he  added,  was  supposed  to  assure  to  individuals 
the  fruits  of  their  own  labor  and  abstinence,  and  "  the  principle  of 
private  property  has  never  yet  had  a  fair  trial  in  any  country.  The 
laws  have  never  yet  conformed  to  the  principles  on  which  justi- 
fication of  private  property  rests.  They  have  heaped  impediments 
on  some  to  give  advantage  to  others.  They  have  purposely  fos- 
tered inequaUties.  ...  If  the  tendency  of  legislation  had  been  to 
favor  the  diffusion  instead  of  the  concentration  of  wealth  —  to 
encourage  subdivision  of  the  large  masses  instead  of  striving  to 
keep  them  together  —  the  principle  of  private  property  would  have 
been  found  to  have  no  necessary  connection  with  the  physical  and 
social  evils  which  almost  all  SociaUst  writers  assume  to  be  insepa- 
rable from  it." 

For  the  further  discussion  of  the  justice  of  the  competitive  system 
of  distribution,  reference  may  be  had  to  G.  Lowes  Dickinson's 
Justice  and  Liberty.  The  following  citations,  however,  concern  the 
present  discussion  mostly  for  their  masterly  analysis  of  the  forces 
going  to  determine  gainfulness  in  terms  of  price : 

"  Whether  a  man  must  work,  whether  he  is  to  be  permitted  to 
work,  or  whether  he  is  to  be  dispensed  from  the  necessity  of  working ; 


DISTRIBUTIVE  ANALYSIS  IN  THE  LARGE     531 

and,  again,  at  what  he  is  to  work,  whether  at  manual  labour  or  at 
one  of  the  professions,  whether  at  a  skilled  or  an  unskilled  employ- 
ment, whether  at  an  art,  or  a  handicraft,  or  a  mechanical  routine ; 
all  this  is  governed  by  the  amount  of  property  owned  by  his  parents 
or  himself.  And,  again,  the  remuneration  he  is  to  receive  for  his 
labour  is  fixed  by  the  same  condition.  Either  he  has  access  to  well- 
paid  or  to  ill-paid  work ;  and  the  access,  though  it  depends  partly 
on  natural  capacity,  depends  still  more,  in  practice,  on  opportunity. 

"...  The  labour  which  is  best  remunerated  and  most  coveted, 
that  of  the  professions  and  of  the  higher  posts  in  business,  is  far 
more  accessible,  if  not  exclusively  accessible,  to  the  sons  of  the  rich 
and  of  the  well-to-do  than  to  others.  It  requires,  to  begin  with, 
an  elaborate  and  expensive  education ;  and  even  if  that  be  dispensed 
with,  relationship  and  social  connexion  count  for  much.  .  .  .  Op- 
portunity is  the  monopoly  of  the  weU-to-do.  It  follows  that  since 
the  well-to-do  are  a  small  minority,  the  great  mass  of  men  are 
predestined  to  the  less  interesting,  more  laborious,  and  worse  re- 
munerated kinds  of  labour.  ...  It  is  not  the  power  to  create  or  ad- 
minister wealth,  but  the  bare  possession  of  it  that  confers  position. 
And  into  possession  of  it  men  come  by  the  most  capricious  and  ac- 
cidental ways,  by  inheritance,  by  gift,  by  lucky  speculation,  or  what 
not. 

"...  Note  what  immense  wealth  is  distributed  without  any 
reference  to  labour  or  desert.  The  existence  of  classes  more  or  less 
hereditary,  the  permanent  stratification  of  society  into  the  rich  and 
the  poor,  in  a  word,  the  plutocratic  character  of  our  community,  is 
due  to  this  feature  of  our  system  of  distribution.  The  principle  on 
which  it  is  based  .  .  .  is  not  desert,  in  the  sense  that  the  recipient  earns 
what  he  receives.  ...  I  should  be  inclined  to  say  that  a  man's 
desert  is  greater  in  proportion  as  his  labour,  being  useful,  is  also 
disagreeable  and  onerous ;  so  that,  of  two  men  making  contribu- 
tions to  wealth,  that  one  would  deserve  and  should  receive  more 
whose  work  was  the  hardest  to  perform.  .  .  .  If  that  view  be  taken, 
it  is  not  desert  that  apportions  the  rewards  of  labour?  On  the 
contrary,  the  most  onerous  and  painful  and  unhealthy  work  is  the 
worst  paid,  and  the  most  agreeable,  healthy,  and  interesting  the 
best.  So  that  it  is  the  very  opposite  of  desert,  in  that  sense  of 
the  term,  that  regulates  the  distribution  of  wages. 

"...  Wliat,  for  instance,  is  a  Barrister's  contribution  to  wealth, 
and  what  is  a  dock-labourer's?  Does,  a  barrister  add  anything? 
Or  does  he  only  subtract?  .  .  .  His  services  are  wanted,  and 
valiied,  because  men  are  dishonest,  or  because  the  law  is  doubtful  and 
obscure.  ...    He  does  not  produce ;  at  the  best  he  diminishes  the 


532  THE  ECONOMICS  OF  ENTERPRISE 

friction  of  production ;  ...  at  the  worst,  when  he  is  engaged,  as  he 
often  is,  in  cxasscrating  not  in  settling  disputes,  he  is  increasing  in- 
stcatl  of  diminishing  the  friction,  and  destroying  rather  than  creating 
wealth. 

"...  Turning  now  to  the  dock-labourer,  or  to  any  class  of  manual 
workers,  they  at  least  are  in  a  very  direct,  simple  and  positive  sense 
producing  wealth.  ...  By  what  process  is  it  decided  that  what 
they  produce  is  worth  sixpence  an  hour,  while  the  barrister's  in- 
tervention to  diminish  or  perhaps  to  increase  the  friction  of  the 
industrial  machine  is  worth  £10,000  a  year? 

"...  The  fact,  at  any  moment,  is  that  scarcity  determines  reward. 
The  more  people  there  are  competing  for  a  piece  of  work,  the  less 
they  get,  and  vice  versa.  And  society  is  so  arranged  that  there 
are  alwaj^s  far  more  people  competing  for  the  more  disagreeable 
and  onerous  tasks,  than  for  the  more  interesting  and  attractive. 

" .  .  .As  tilings  are  now,  all  the  occupations  that  are  most  inter- 
esting, stimulating  and  delightful,  that  employ  the  highest  faculties, 
and  are  the  most  worth  doing  for  their  own  sake,  are,  broadly  speak- 
ing, the  best  paid,  wliile  those  that  are  sordid,  dreary,  mechanical, 
dehumanising,  hardly  receive  a  living  wage.  .  .  . 

"...  The  one  motive  of  the  exploiter  being  to  make  money  for 
himself  and  incidentally  for  his  shareholders,  he  and  they  will  always 
be  ready  to  make  it  at  all  cost  to  society.  It  will  not  matter  to 
them  whether  what  they  produce  is  a  good  thing  or  a  bad  thing,  so 
long  as  it  is  one  for  which,  by  fair  means  or  foul,  they  can  create  a 
demand.  They  are  as  likely  to  devote  their  energies  to  poisoning 
the  community  as  to  feeding  it,  if  the  community,  as  is  unfortunately 
apt  to  be  the  case,  responds  to  the  invitation  to  be  poisoned. 

"  The  capitalist  .  .  .  plays  on  the  instrument  the  tune  he  pre- 
fers, and  his  tune  is  apt  to  be  very  low  and  vulgar.  Nay,  when  he 
comes  to  deal  with  uncivihsed  peoples,  what  he  plays  is  a  dance  of 
death ;  for  he  does  quite  deliberately,  and  with  a  clear  conscience, 
exterminate  them  by  cheap  gin  unless  the  pubhc  authority  inter- 
venes. ...  It  is  no  part  of  the  capitalist's  aim  to  husband  the 
resources  of  any  conununity.  If  he  can  pay  big  di\adends,  say 
for  fifty  years,  that  is  all  he  need  trouble  about.  The  future  of  a 
country  or  a  society  is  nothing  to  him,  for  he  will  not  be  there  to 
make  money  out  of  it.  So  that,  for  instance,  he  will  always  be  in 
a  feverish  haste  to  exploit,  natural  wealth  at  all  and  every  cost  to 
the  community.  He  will  cut  down  its  forests,  exhaust  its  mines, 
spoil  its  chmate,  and  ruin  its  population  body  and  soul  —  as  was 
done  in  this  country  and  in  all  countries  during  the  industrial  revo- 


DISTRIBUTIVE  ANALYSIS  IN   THE  LARGE     533 

lution  until  the  State  stepped  in  to  stop  it,  and  as  is  being  done 
before  our  eyes  at  this  moment  in  the  Congo  Free  State,  not  to 
speak  of  cases  nearer  home.  All  this  he  will  do  without  ruth,  with- 
out shame,  without  reflexion  even,  if,  in  his  short-sighted  book- 
keeping, it  seems  to  pay  him  to  do  it.  .  .  .  The  system  of  pro- 
viding in  this  particular  way  the  stimulus  to  and  the  direction  of 
production  does  lead  to  these  consequences,  and  they  must  be  set 
off  against  its  undoubted  efficacy  as  a  developer  of  energy  and  in- 
telligence. 

"...  Our  method  of  flinging  upon  the  resources  and  the  popula- 
tions of  the  world  the  unconscionable  greed  of  capital,  is  open  to 
these  very  grave  objections.  I  might  add  others,  and  especially 
those  which  are  recognized  as  the  '  wastes  of  competition,'  ad- 
vertisement, overproduction,  adulteration,  commissions  and  all  the 
rest  of  it.  But  I  have  said  enough  to  remind  you  that  the  price 
paid  for  our  method  of  stimulating  production  is  a  pretty  heavy 
one"  (pp.  55-132  passim). 


INDEX 


Abstinence :  see  Interest. 

Abstraction :  as  scientific  method, 
101. 

Accumulation  :  as  test  of  productive- 
ness, 123. 

Acquittance :  see  Money  and  Cur- 
rency. 

Adaptation  :  see  Man  and  Environ- 
ment. 

Advantage  and  Size  :   see  Returns. 

Affiliations  :   and  gains,  399. 

Agriculture :  improvements,  related 
to  rent,  201 ;  enlarge  cities, 
201  :   see  Land,  Land  rent. 

Annuities :  all  durable  properties 
bear,  223  ;  present  worth  of, 
225,  228. 

Art  vs.  Science,  29. 

Austrian  School :  marginal  analysis, 
53. 


B 


Bagehot,  Walter :  on  loan  fund,  345. 

Balance  of  Trade :  in  Mercantilist 
doctrine,  506.  See  Money 
and  Currency. 

Banking :  see  Money  and  Currency. 

Bargaining :  see  Price. 

Barter,  4 ;  requires  two  price  trades, 
237  ;  inconveniences  of,  237; 
multiplies  intermediates, 
237,  255. 

Bastiat,  F.:   512. 

Bergson,  Henri :    174. 

Bimetallism :  see  Money  and  Cur- 
rency. 

Biology :   see  Specialization. 

Black  Death  :  425. 

Boehm-Bawerk,  Eugen  v. :  54, 55,  65, 
168. 

Bounty  of  Nature:  495.  See  Distri- 
bution. 


Brown,  Harry  C. :  250, 
Bullion  :  see  Money  and  Currency. 
Bullock,  C.  F. :    25,  374,  429. 
Business  Ethics  :  see  Ethics. 


Cairnes,  J.  E.  :    345,  346. 

Calculation  :   see  Utility. 

Cameralists :  505. 

Capital,  Capitalization,  and  Interest : 
Capital :  what  wealth  is  produc- 
tive, 491. 
All  income  is  psychic,  488 ;  pri- 
vate and  social,  19,  331- 
342,  497;  definition,  132; 
money  is,  334 ;  is  credit  ? 
334  ;  social  capital  a  vague 
concept,  333 ;  collectivist 
capital,  336  ;  what  capital 
includes,  161,  335  ;  all  rent- 
earners  are  capital,  128, 
162 ;  all  durable  goods  are 
capital,  209 ;  capital  cor- 
relative with  interest,  162, 
173 ;  anti-social  uses,  134, 
272;  test  of  capital,  172- 
176  ;  Socialistic  view,  501 ; 
intangible  assets,  131  ; 
loan  fund,  407 ;  savings 
and  supply,  338,  342,  367; 
stored-up  labor,  163,  373- 
376. 
Land  vs.  Capital :  origin  of  dis- 
tinction, 372 ;  classical 
view,  163-172 ;  natural  vs. 
artificial  instruments,  165 ; 
origins,  165,  167,  358, 
509;  technology,  166,  515; 
mobility,  168,  elasticity 
of  supply,  169;  political 
significance,  171  ;  dimin- 
ishing returns,  171 ;  Eng- 
lish Law,  510.  See  Chaps. 
XII,  XIII. 


535 


536 


INDEX 


Materiality  :  515 ;  wholesome- 
noss  of  use,  516 ;  soeial  wel- 
fare, 52S  ;  some  capital  not 
due  to  latior  or  saviiin,  1359 ; 
some  land  produced,  IGS; 
growth  of  capital,  339  ;  error 
from  wrong  concept,  528. 
Loan  fund  form :  the  thing 
lent,  342 ;  a  part  of  the 
currency,  406 ;  recognized 
as  capital  by  high  author- 
ity —  Ricardo,  Bagehot,  and 
Cairnes,  344-346 ;  nature 
and  supply,  339-342 ;  rela- 
tion to  social  welfare,  342 ; 
source  in  savings  and  in 
banking,  347,  407. 

Capital  and  Capitalization  correlative 
terms,  210-211  ;  free  men 
not  capital,  211. 

Capitalization,  Chaps.  XIV,  XV; 
vs.  cost  as  fixing  price,  211- 
216;  with  durable  consump- 
tion goods,  212;  with  du- 
rable production  goods,  213- 
217 ;  doctrine        applies 

safely  only  in  money  econ- 
omy, 221 ;  reducing  future 
incomes  to  present  price, 
210  ;  incomes  of  use,  209  ; 
rates  and  capitalization, 
409 ;  individualized  analysis, 
410 ;  offered  view  vs.  cur- 
rent view,  225 ;  over-ration- 
alization, 227. 
Interest :  paid  to  modify  the  money 
circulation  of  income,  355- 
356 ;  distinguished  from 
rent,  132 ;  loan  vs.  rental, 
347 ;  interest  paid  for  pres- 
ent currency  against  future, 
386 ;  abstinence  and  inter- 
est, 357,  359,  362,  387,  .389 ; 
abstinence,  rightly  inter- 
preted, a  truism  —  a  fore- 
gone use,  362-363 ;  but  not 
a  pain,  373 ;  abstinence  in 
renting  land,  371  ;  marginal 
saving,  e.g.  Rockefeller, 
366-367 ;  dififerent  absti- 
nence theories,  370-376. 
Rates  :  many,  409  ;  a  time  com- 
pensation for  a  time  use, 
492 ;    the  rate  a  price  ad- 


justment between  demand 
and  supply,  332 ;  reserva- 
tion rates,  3S2-385 ;  not  a 
pleasure-pain  equation,  386. 
Demand :  gainful  uses,  368- 
369  ;  variety  of  investment, 
411;  rents,  403,  462;  na- 
ture of  returns,  376  ;  operas 
tors'  surpluses,  379  ;  social 
service,  380 ;  durable  con- 
sumption goods,  377-379 ; 
several  independent  causes 
of  gain  to  borrower,  381 ; 
present  income  vs.  future, 
364-365. 
Supply :  abstinence,  362-363, 
370-376  ;  banking,  349  ;  its 
effect  on  interest  rates,  349- 
352,  387 ;  components  of 
bank  rate,  351 ;  banking  is 
insurance,  349,  352. 

Car^^er,  T.  N. :    167,  450,  526. 

Cause  and  Effect :  separation  of,  107, 
116. 

Census :  of  wealth  in  U.  S.,  519 ; 
criticism,  520. 

Charity:  309. 

Checks :   see  Money  and  Currency. 

China  :   product  in,  6  ;    wages  in,  6. 

Cities:  cause  of  growth,  200-202; 
rents  in:  see  Land  and 
Rents. 

Clark,  J.  B.  :  453. 

Classification  of  Factors:  Chap. 
XXII.  See  Factors  of  Pro- 
duction. 

Climate  :   see  Man  and  En^dronment. 

Coin  :   see  Money  and  Currency. 

Collectivism :   defined,  62-63. 

Combination  :   see  Monopoly. 

Commodities :  see  Consumption 
Goods. 

Communism  :    defined,  62,  63. 

Communities  of  Interest :  related  to 
gain,  399. 

Competition :  defined,  474 ;  good 
and  ill  in,  476 ;  merely  a 
present  institution,  20 ; 
wastes  in,  478 ;  often  self- 
destructive,  479,  482. 

Competitive  Order :  Chaps.  II,  III, 
IV;  is  pecuniary,  21. 

Complementarity :  see  Factors  of 
Production. 


INDEX 


537 


Concentration  :   see  Giant  Business. 

Consumers'  surpluses,  monopoly  :  see 
Surpluses. 

Consumption   vs.  destruction,  491. 

Consumption  Goods :  immediate, 
future  and  durable,  209 ; 
limitation  on,  2  ;  average,  2  ; 
elasticity  of  use,  455 ;  with 
food  products,  456-458. 

Corporations  :   see  Giant  Business. 

Correspondence :  see  Man  and  En- 
vironment. 

Cost :   see  Price. 

Cost  of  Production  :  see  Price ;  costs 
mainly  identical  with  dis- 
tributive shares,  413  ;  tradi- 
tional view  of  kinds,  414- 
416. 

Credit :   see  Money  and  Currency. 

Crises  :   see  Money  and  Currency. 

Cultivation :  Margin  of,  see  Land 
and  Land  Rent. 

Currency  :  see  Money  and. 

Customs :  see  Tariff. 

D 

Deferred  Payments  :  see  Money  and 
Currency. 

Demand:  see  Price;  as  explaining 
opportunity  cost,   see  Price. 

Depressions :  see  Money  and  Cur- 
rency. 

Desiredness :  see  Utility. 

Desires :  see  Utility  ;  desires  related 
to  products,  3 ;  hedonism, 
86  ;    for  pleasure,  86. 

Destruction  vs.  consumption,  491. 

Diagrams :  see  Graphs. 

Dickenson,  G.  Lowes,  530. 

Diminishing  Return  :   see  Returns. 

Disorder :  see  Security. 

Distribution :  defined,  10 ;  viewed 
in  the  aggregate.  Chap. 
XXVIII ;  dependent  on 
production,  490,  491  ;  a 
price  process  and  problem, 
29, 138  ;  costs  are  distributive 
shares,  190,  413;  primary 
and  secondary,  138,  494 ; 
affected  by  property  institu- 
tions, 495,  531 ;  by  taxes, 
494,  527;  privilege,  496; 
franchises,  496 ;  monopolies, 


496 ;  wealth  and  opportu- 
nity, 497  ;  gifts,  494  ;  durable 
goods,  491.  See  Proportion 
of  Factors. 
Productivity  Theory  of.  Chap.  X ;  a 
price  process,  138  ;  validity 
of,  140 ;  scarce  factors 
favored,  448-449.  See  Pro- 
ductivity Theory. 

Dividends :  related  to  risk,  interest 
and  profit,  459.  See  Giant 
Business. 

Division  of  Labor :  see  Specializa- 
tion. 

Dumping,  473. 

Durable  goods  :  absorb  capital,  377 ; 
bear  income,  see  Income; 
and  capital,   see  Capital. 

Dynamics  :  vs.  Statics,  424  ;  classifi- 
cation of  changes,  453  ;  im- 
proved technique,  453 ;  re- 
lated especially  to  land  rent, 
455.  iSee  Factors  of  Produc- 
tion ;   Returns. 


E 


Economics :  defined,  25 ;  the  field, 
25 ;  economic  motive  is 
least  sacrifice,  59 ;  relative 
to  conditions,  30 ;  need  of 
a  new,  528-530. 

Efficiency :  isolation,  34-35.  See 
Wages,  Specialization,  In- 
terdependence, Productiv- 
ity, Distribution. 

Elasticity :  supply,  see  Cost ;  of  con- 
sumption, 51.  (See  Land  and 
Rent. 

EHot,  George:  12,  87. 

Ely,  R.  T. :  25. 

England,  Bank  of  :  286. 

Entrepreneur:  defined,  67;  point  of 
view  in  Economics,  143 ; 
who  are,  139 ;  role  in  Dis- 
tribution, 139. 

Environment :  Chap.  I ;  differences 
in,  6.     <See  Man  and. 

Experience :  as  test  of  what  is,  87, 
121. 

Explanation  :   what  is,  389-391. 

Ethics:  code  of  business,  461  ;  Ethics 
and  Economics,  29 ;  as  test 
of  product,  126-127. 


538 


INDEX 


Exchange :  oompotitivc  requires 
money,  37  ;  transfers  goods, 
not  values,  247.  Sec  Price 
Regime;  Money;  Price; 
Specialization ;  Competi- 
tion. 

Expansion  :  sec  Money  and  Currency. 

Expenses  of  Production  :    sec  Cost. 


Factors  of  Production  :  Chap.  XXII ; 
traditional  classification, 
161,  179,  413-415;  four- 
fold, 429;  condemned,  421 ; 
a  great  diversity  in  degree 
and  kind,  417;  traditional 
exaggeration  of  technology, 
446  ;  what  costs  are  techno- 
logical, 447 ;  interrelations 
of  factors,  419;  interde- 
pendence and  substitution, 
179,  420,  448;  limits  on 
substitution,  178-179 ;  com- 
plementary factors,  449 ; 
different  relations  to  each 
entrepreneur,  427 ;  condi- 
tion one  another  in  use  and 
as  costs,  116  ;  the  technolog- 
ical relations,  431.  See  Re- 
turns ;  Proportion  of  Fac- 
tors. 

Farming :  profits  related  to  size  of 
investment,  498-501. 

Fetter,  F.  A. :   25,  257,  488. 

Fisher,  Irving  :   250,  369. 

Fluctuation :  see  Money  and  Cur- 
rency. 

Franchises :  see  Capital ;  Distribu- 
tion. 


G 


Gambling :  405. 

Generalizations:  their  adequacy,  101. 
See  Abstraction. 

Giant  Business  :  monopoly  methods, 
472  ;  contrasted  with  farm- 
ing, 464  ;  costs  in,  see  Price. 
See  Monopoly ;   Returns. 

Gifts :  see  Distribution. 

Gold  :  see  Money  and  Currency. 

Goods:  defined,  1,  102;  durable,  see 
Capital ;      as    demand    for 


other  goods,  and  for  money, 
39.  See  Utility;  Price; 
Money  and  Currency. 

Graphs  :    of  price  adjustment,  48-50. 

Gregory,  Kcllar  and  Bishop :  Physi- 
cal and  Commercial  Geog- 
raphy, 13. 

Gresham's  Law  :  see  Money  and  Cur- 
rency. 


H 


Habit :   relation  to  utility,  98. 
Hadley,  A.  T. :  375. 
Harriman,  E.  H.:  462. 
Hedonism  :  86  ;  not  implied  in  util- 
ity, 99. 
Higgling :  see  Price. 
High  Finance :   see  Giant  Business. 
Hobson,  J.  A. :   189. 
Hyde,  A.  M. :   189. 
Hypothesis  :  place  of,  390. 


Idle  plants :  468. 

Income :  nominal  and  real,  1 ;  are 
psychic,  488 ;  does  not  im- 
ply hiring  or  renting,  131. 
See  Capital,  Capitalization 
and  Interest. 

Increasing  Return  :  see  Returns. 

India  :  wages  in,  2,  3. 

Individuality  :   test  of,  389. 

Inflation  :  see  Money  and  Currency. 

Institutions :   change,  19. 

Insurance  :  Chap.  XX  ;  as  cost,  399  ; 
banking  is,  349-352. 

Intangible  assets  :   see  Capital. 

Integration  of  industry :  see  Giant 
Business. 

Intelligence  :   and  production,  8. 

Interdependence :  and  specializa- 
tion, 33  ;   efficiency,  33. 

Interest :  see  Capital. 

International  Trade :  see  Money  and 
Currency  ;  Tariffs. 

Isolation  :  hardships  and  inefficiency 
in,  35.   See  Efficiency. 


Jevons,  W.  S. : 
Johnson,  A.  S. : 


189. 
25,  189. 


INDEX 


539 


K 

King :   Gregory's  Law,  456. 


Labor :    see  Wages. 
Labor  cost :     see  Price. 

Laissez  faire  :   477,  479,  511,  513. 

Land  and  Land  Rent :    Chaps.  XII, 
XIII;  Land   as  capital,  see 
Capital :  Land  rent  as  cost, 
see  Price. 
Land    Rent :     Ricardian    doctrine, 
181-183,      184-187;      criti- 
cism of,   186-188;   views   of 
Ricardian      disciples,      186- 
187;    later    development    of 
Ricardian  doctrine,  186. 
Population    and    rural  rent :    190 
and    urban    rent,    190;    ex- 
tension of  cultivation,   180 
intensive      and      extensive 
181  ;    margins,     181  ;     ulti- 
mate  causes    of    rent,   207 
technology  and,  Chap.  XII 
420 ;      transportation     and 
421,      455;       urban      rents 
compared   with  rural,    197 
-differentials    of    position    in 
urban    rents,     197 ;     nature 
of    advantages,    198 ;     ulti- 
mate causes,    197 ;    tenden- 
cies, 200-202. 
Rents  and  individual  desert,  198 ; 
up-keep  of  land,  178. 

Laughlin,  J.  L. :  311,  312,  313,  314, 
316. 

Law    of    Diminishing    Returns :     see 
Returns. 
Of  Increasing  Returns  :  see  Returns. 

Least  Resistance  :  see  Sacrifice. 

Liberty :  advantages  of,  see  Laissez 
faire. 

Loan  Fund  :  see  Capital. 

Luxury:  308. 

M 

Macfarlane,  C.  W. :  189. 

Malthus,  T.  R. :  425. 

Man  and  Environment :  Chap.  I,  2, 
5;  in  United  States,  524- 
526 ;  adaptation  of  differ- 
ent kinds,   13 ;    mostly  in- 


tellectual, 13  ;  limits  on,  15 ; 
interactions,  11. 
Man :  as  producer,  7 ;  intelli- 
gence, 8 ;  morality,  8 ; 
foresight,  8  ;  institutions,  9- 
10. 
Man :  not  product  or  wealth  or 
capital,  124,  211. 

Margins :  in  general,  53.  See  Price ; 
Land  rent. 

Market :  concept  of,  383 ;  market 
price,  see  Price ;  market 
value,  see  Price. 

Marshall,  Alfred:  25,  189,  401, 
429. 

Marx,  Carl :   301,  312. 

Materiality :  see  Capital ;  Produc- 
tion. 

Measurement :  is  quantitative,  243. 
See  Money  ;  Value  ;  Price. 

Mill,  James :   515. 

Mill,  J.  S. :    25,  189,  429,  508,  530. 

Mismanagement :  of  business  for 
gain,  460.  See  Giant  Busi- 
ness. 

Money  and  Currency :  Chap.  XVII. 
Money:  defined,  4,256,  257;  rela- 
tions between  money,  271 ; 
test  of,  not  in  redeemability 
or  legal  tender  power,  257 ; 
but  in  service  as  actual  in- 
termediate, 255 ;  required 
for  exchanges,  37 ;  making 
possible  competitive  special- 
ization, 37  ;  effects  on  social 
dividend,  4  ;  is  general  pur- 
chasing power,  489-490 ;  all 
its  functions  aspects  of  the 
intermediate  function,  255 ; 
standard,  255 ;  storehouse 
of  purchasing  power,  40, 
256 ;  optional  power,  40, 
269  ;  power  of  legal  acquit- 
tance, 256 ;  important  qual- 
ities, 259 ;  gold  and  silver 
fulfUl,  259. 
Barter :  obviated,  4,  38 ;  with  its 
inconveniences  in  the  multi- 
plication of  media,  38,  255  ; 
money  the  specialized  inter- 
mediate, 237. 
Money  as  standard :  cannot  ex- 
press or  measure  utility,  93  ; 
or  anything  else,  239-243. 


540 


INDEX 


Money  more  than  mere  com- 
modity, with  distinctive 
theory,  271. 
Currency:  made  up  of  money  and 
substitute  media,  254 ;  as 
intermediate,  255. 

Demand  for  currency  in  ex- 
changes, explained  by 
trader's  surpluses,  267  ;  al- 
location of  these,  267-269; 
sellers'  the  greater,  268 ; 
elasticity  and  inelasticity  of 
demand,  269,  271-273. 

Supply  :  sources  of,  257 ;  bullion 
statistics,  321,  325-326  ;  cost 
of  production,  265. 
Banking  supplies  currency  — 
credit,  40,  259-263,  317; 
credit  based  more  on  pros- 
pective product  and  income 
than  on  existing  wealth,  277 ; 
what  banks  lend,  263  ;  un- 
derwTite  credit,  creating  cur- 
rency, 260,  263  ;  analysis  of 
discount  rate,  351 ;  method 
of  issue  of  deposit  credit, 
260 ;  this  credit  currency  is 
part  of  loan  fund,  264  ;  cost 
of  supplying  it,  265-267 ; 
effects  on  interest  rates,  349- 
352 ;  basis  of  banks  sol- 
vency, 264. 
Reserves :  function  of,  261 ; 
economy  of  use,  262 ;  legal 
requirements,  286 ;  double 
counting,  288 ;  aggregate 
and  separate,  286,  287. 

Commercial  Crises :  280-295  ; 
credit :  benefits  of  and  dan- 
gers, 283  ;  collapse  of,  282  ; 
conditions  preceding  crisis, 
280 ;  rising  prices,  281 ; 
some  credit  contracts,  291, 
298;  other  expands,  293, 
298;  effects,  290-291;  re- 
stricted production,  292 ; 
restricted  consumption,  293; 
falling  bidders'  prices,  fall- 
ing reservation  prices,  and 
falling  market  prices,  318- 
319  ;  responsibility  for,  287, 
289,  294;  duties  of  banks, 
in  crisis,  285,  289  ;  reorgani- 
zation to  prevent,  284. 


Depression  after  crisis :  295- 
306  ;  high  prices  and  high 
dividends  displaced  by  low, 
295-297;  prices  fall  un- 
equally, 298 ;  and  faster 
than  wages,  299  ;  disturbed 
production,  300 ;  disposi- 
tion to  save  rather  than  to 
consume,  300-304 ;  empha- 
sis on  money  and  on  provi- 
sion for  the  future,  301,  302  ; 
borrowing  for  equipment 
purposes  fails,  304-305  ;  un- 
der consumption,  319;  the 
revival,  303. 

Deferred  Payments  :  Chap.  XVI; 
money  is  the  standard,  238 ; 
its  function  as  quid-pro-quo, 
238,  246;  its  instability, 
243-246 ;  harming  debtor 
or  creditor,  245 ;  test  in 
equality  of  utility,  242,  247  ; 
notin  value,  241-244;  value 
as  a  ratio  between  goods  is 
not  quantitative,  and  can- 
not measure  or  imply  equal- 
ity or  inequality  of  service, 
239-243  ;  not  durable  goods 
but  only  immediate  con- 
sumables included  in  proper 
payment,  249. 

Quantity  Theory  :  310-321;  In- 
flation and  prices,  279,  280 ; 
phenomena  of  crisis,  317; 
and  depressions,  319. 

Gresham's  Law  :  278 ;  in  inter- 
national trade,  278.  See 
Bimetallism. 

Bimetallism:  321-330;  com- 
pensatory action,  321-325 ; 
national,  324-325 ;  inter- 
national, 324-325;  effects, 
327-330 ;  advantages  and 
disadvantages,  327-330. 
Monopoly:  Chap.  XXVI;  defined 
in  contrast  with  competi- 
tion, 474-476  ;  natural,  481 ; 
present  in  degree  in  all  pros- 
perous business,  486 ; 
buyers'  with  sellers',  482, 
483 ;  unwise  legislation 
creating,  484 ;  influences 
pressing  toward,  482  ;  giant 
industry,  484 ;     transporta- 


INDEX 


541 


tion,  481 ;  cut-throat  com- 
petition, 483 ;  effects  on 
distribution,  497 ;  inroads 
on  producers'  and  consum- 
ers' surpluses,  481  ;  surplus 
products,  473  ;  idle  plants, 
468 ;  costs  in  monopoly 
production,  463 ;  fixing 
prices,  464  ;  group  control, 
485 ;  regulation,  485. 

N 

Natural  Law :  512-513. 

Natural  Bounty  :   520.   (See  Distribu- 
tion. 

Needs :  see  Desires. 

Newspapers :    expenses  in  establish- 
ing, 486. 

Nominal  income  :   see  Income. 
1907  :  panic  year,  286. 


O 


Officers :  gains  from  mismanagement, 
460;    from  speculation,  461. 

Opportunity  :   differentials  of,  400. 

Opportunity  cost :  see  Price. 

Optimism :  511. 

Ostentation,  309. 

Over-rationalization :  in  capitaliza- 
tion analysis,  227-232 ;  in 
demand  analysis,  100-102. 

Ownership  :  see  Regime  of  Price. 


Pain :  minimizing  of,  59.  <See  He- 
donism. 

Panics  :  see  Money  and  Currency. 

Parasitism  :  consistent  with  produc- 
tion, 127. 

Patten,  Simon  :   189. 

Payment :   see  Money  and  Currency. 

Physiocrats :  507. 

Pioneer :  hardships  of,  35. 

Pleasure :  maximizing  of,  59.  See 
Hedonism. 

Plotting :  see  Graphs. 

Point  of  view  :  see  Viewpoint. 

Political  Economy  :   see  Economics. 

Population :  place  in  Physiocratic 
doctrine,  507 ;  land  supply, 
180-181 ;      rent,     180-181 ; 


wages,    180-181,    450.     See 
Rent ;   Wages. 

Poverty  in  United  States,  527. 

Power,  as  income,  493. 

Predation  :    consistent  with  produc- 
tion, 127. 

Present :  it  exists,  174. 

Price  :  defined,  23  ;  organizing,  cen- 
tral and  characteristic  in 
competitive  order,  21-28, 
37,  38 ;  ultimate  forces 
in,  143 ;  antagonism  with 
utility,  480 ;  of  durable 
goods,  involves  capitaliza- 
tion, 219;  price  exchanges 
are  the  actual,  39.  <See 
Capitalization. 
Demand  with  Supply : 

Process  of  adjustment :  Chap. 
V,  82  ;  affected  by  changes 
in  either  term,  85;  terms 
goods,  not  values,  247 ;  af- 
fects volume  of  sales,  57 ; 
interdependence  of  all  prices, 
113,  274  ;  reservation  prices, 
46-48 ;  external  view  of 
market ;  internal  or  analytic 
view,  44  ;  higgling,  96. 
Demand :  reciprocal  between 
money  and  good,  51 ;  de- 
mand schedule,  43 ;  assumes 
prices  on  other  goods,  113; 
is  money  demand  for  a 
particular  good,  39 ;  gen- 
eral relation  to  good,  141 ; 
alternative  function  as  cost, 
71,  72 ;  does  it  require 
analysis  ?  97.  See  Utility. 
Marginal  Utility,  85,  88-90;  de- 
pendent on  scarcity,  91 ; 
related  to  price  offer,  91  ; 
but  incommensurable  with, 
92 ;  extremely  rationalized 
concept,  98-99 ;  marginal 
price  offer,  81 ;  fixed  by 
comparison  of  marginal  utili- 
ties, 93;  only  a  temporary 
indifference,  101. 
Supply:  Chaps.  VI,  VIII;  price 
with  fixed  supply,  57 ;  as 
with  monopoly,  464. 
Cost,  Cost  of  Production :  focus- 
ing point  of  influences,  74, 
75 ;    price-determining   and 


542 


INDEX 


price-dctormincd,  193 ;  costs 
are  distributive  shares,  190 ; 
in  isolated  economy,   60. 

Entrepreneur  cost :  Chap.  VII, 
191 ;  not  fundamental,  106- 
108;  forward-looking,  69; 
the  price  denominator,  70  ; 
what  are  included,  and  their 
bases,  4l3;  traditional  doc- 
trine, 414-416;  innumer- 
able kinds  and  bases,  133, 
159;  all  hires  are,  160; 
principal  kinds,  61,  67,  160; 
connotes  elastic  supply,  63  ; 
cost  analysis  more  difficult 
than  demand,  142  ;  circuity, 
113 ;  ultimate  causes  in 
scarce  factors,  75,  1'11-116; 
assume  prices  on  other  prod- 
ucts, 113-114;  resisting  de- 
mands as  costs,  36,  71-72  ; 
costs  are  reservation  prices, 
46-48,  73 ;  opportunity 
costs,  61,  63,  65,  190,  191; 
alternative  profits,  neces- 
sary and  unnecessary,  66, 
148.  152,  190-191.  464; 
margins  and  cost,  64-65. 

Pain  as  cost :  labor  pain,  60,  70.  73, 
79,  82, 107. 

Risk,  as  cost:  Chap.  XX,  399; 
insurance,  399. 

Rent,  as  cost :  Chaps.  XII,  XIII, 
175 ;  ultimate  causes  of 
rent  costs,  190,  192 ;  busi- 
ness rents  in  cities,  204-208  ; 
are  selling  costs :  views  of 
J.  S.  Mill,  Jevons,  Patten, 
Hobson,  Macfarlane,  A.  S. 
Johnson,  Marshall,  —  189 ; 
various  land  differentials  as 
costs,  188.     See  Capital. 

Interchangeability  of  costs,  178. 

Long-time  and  short-time,  441, 
468-472. 

Margins  and  Marginality  :  64,  77, 
78,  81,  95;  in  classical  doc- 
trine, 164 ;  pain  margins, 
81 ;  marginal  businesses,  78  ; 
not  determinants,  95. 

Giant  Industry  :  464-467;  costs  in 
average  conditions,  469  ;  fa- 
vorable, 470  ;  adverse,  471. 
See  Chap.  XXV. 


Monopoly  costs,  463. 

Size    of    business,    440-442.     See 

Returns. 
Scarce  factors,  448. 

Price  Il6gime  :    Chaps.  II,  III,  IV. 

Producers'  surpluses  :   see  Surpluses. 

Product :  includes,  491  ;  irrelevant 
whether  producer  consumes, 
128  ;  variety  of,  material  and 
immaterial,  120;  men  are 
not,  124 ;  related  to  desire,  3. 

Production:  what  is.  Chap.  IX; 
tested  by  price  results,  121, 
376 ;  not  by  materiality, 
121,  125;  or  tangibility, 
121,  125 ;  or  permanency, 
123 ;  or  deserving,  126 ; 
means  merely  proceeds,  127  ; 
theft,  etc.,  are,  130;  limits 
Distribution,  490-491.  See 
Distribution. 

Productive  vs.  unproductive :  his- 
torical views,  123 ;  lands, 
machines,  men  fall  under 
same  test,  128;  in  all  their 
valuable  uses,  128  ;  produc- 
tive factors,  see  Factors  of 
Production. 

Productivity,  Productivity  Theory : 
Chap.  X  ;  see  Distribution  ; 
productivity  not  precisely 
distinguishable,  145,  146, 
147,  148,  217;  all  durable 
wealth  is,  492 ;  product 
means  proceeds,  150-152 ; 
no  ethical  connotations,  153. 

Profit :  defined,  132,  404  ;  related 
to  risk,  401 ;  wages  and  prof- 
its distinguished,  66,  67 ; 
profits  and  size,  440—442 ; 
surpluses,  152. 

Property :  see  Distribution ;  Regime 
of  Price. 

Proportion  of  Factors :    see  Returns. 

Protective  Tariff :  see  Tariff. 

Providence  guides  :  511. 

Psychic  Income:  see  Income. 

Psychology :  of  price  offer,  100. 

Public  work :    best  done  when,  309. 

Q 
Qualities  :   are  relative  to  men,  87. 
Quantity  Theory  of  Money  :  311-321. 
See  Money  and  Currency. 


INDEX 


543 


R 


Rationalization :  see  Over-ration- 
alization. 

Redeemability  :  see  Money  and  Cur- 
rency. 

Regime  of  Price :   Chaps.  II,  III,  IV. 

Rent :  see  Capital  and  Interest  ; 
Land  and  Rent;  rent  distin- 
gui.shed  from  interest,  128. 

Reservation  price:    128,  382-385. 

Reserves  :    see  Money  and  Currency. 

Resistance,  least :  see  Sacrifice. 

Returns,  Laws  of :  Chap.  XXIII ; 
factors  of  production,  tra- 
ditional view,  414-416;  the 
principle  of  proportion,  423  ; 
static  vs.  dynamic,  and  social 
vs.  competitive,  423,  430, 
433,  436  ;  proportions  and 
relative  prices,  430 ;  in 
view  of  prices  of  products, 
430 ;  wider  than  a  land 
law,  431 ;  or  than  technolog- 
ical relations,  431 ;  bearings, 
435  ;  distribution  and.  Chap. 
XXIV,  435. 
Advantage  and  Size :  Chap. 
XXIII,  438,  498;  applies 
to  competing  industries, 
441  ;  a  law  of  price  results : 
applications,  442 ;  related 
to  profits,  441-442,  498;  two 
laws  distinguished,  438- 
441  ;  economies  of  size  and 
danger  from,  479,  485. 

Ricardo,  David  :  183,373.  -SeeRent; 
Rent  and  Cost,  Labor  cost; 
Pain  as  cost ;  Capital ; 
Land  and  Rent  Distribu- 
tion; Price. 

Risk :  and  profit,  400  ;  and  interest, 
401,  461;  and  dividends, 
462 ;  noninsurable  risks, 
399;  are  costs,  398;  affilia- 
tions related  to  risks,  399  ; 
distribution  of  gains  and 
losses,  403,  Chap.  XX. 

Roscher,  Wilhelm,  7. 


S 


Sacrifice,    least :      the     fundamental 
generalization,  58-59. 


Salary :  see  Wages. 

Sales  :  see  Exchange ;  Price. 

Savings :  as  loan  fund,  see  Capital ;  ia 
all  good?  306-307;  rela- 
tion to  social  capital,  408. 
iSee  Capital ;  Depressions  ; 
Abstinence. 

Seager,  Henry:   25,  429. 

Security  :  and  product,  9. 

Selfishness:  as  datum  in  science,  101. 

Seligman,  E.  R.  A. :   25,  430. 

Senior,  N.  W. :    29,  30,  57,  375. 

Services:  are  products,  123;  general 
nature  of,  123,  125 ;  as  in 
social  dividend,  493. 

Sidgwick,  H.  :   25. 

Silver  :  see  Money  and  Currency. 

Single  Tax  :  522,  527. 

Size  :  see  Returns;  Monopoly. 

Slavery :   10. 

Small  competitor:    greater  risks,  401. 

Smith,  Adam  :  25,  508. 

Social  Capital :  what  is,  19.  See  Capi- 
tal. 

Social  Dividend:  Chap.  XXVII; 
nature,  1,  488  ;  includes  all 
consumable  valuable  goods, 
489 ;  not  money,  4 ;  but 
services  of  men  and  of  du- 
rable consumption  goods, 
492  ;  power  and  prestige, 
493.    See  Distribution. 

Socialism :  62-63 ;  its  system  of 
theory,  31. 

Social  Organism :  387-394 ;  and 
Productivity  Theory,  153- 
155. 

Specialization:  Chap.  IV;  cost  of 
production  one  aspect  of, 
58.  .See  Money  and  Cur- 
rency. 

Speculation  :  404,  Chap.  XX. 

Spending :  defined,  358.    5ee  Luxury. 

Standard  :  see  Money  and  Currency; 
of  living,  307;  and  wages,  2, 
450—452 ;  rising  in  United 
States,  523. 

Static  analysis :  and  dynamic,  424- 
425,  450. 

Stock  Exchange :  price-making  in, 
42. 

Stocks  :   statistics  of  prices  in,  296. 

Subjective  valuation:   93. 

Substitution :   see  Returns. 


544 


INDEX 


Supply:  related  to  situation,  17;  sec 
Price  ;  niarginality  and,  81. 

Surpluses:  traders,  481;  monopoly 
and,  481.     See  Profits. 

Survival  of  fittest.  20-21. 


Tangibility :  see  Production. 

Tariff,  protective :  monetary  diffi- 
culties, 280. 

Taussig,  F.  A. :    163,  374. 

Taxation:  437,  443,  522,  527,  529. 
See  Price. 

Technology :  traditional  exaggera- 
tion, 446 ;  what  costs  are, 
416,  447 ;  and  land  rents, 
455-458. 

Theft :   ia  productive,  150,  153. 

Time :  and  product,  492.  See  Capital, 
Capitalization,  and  Interest. 

Trade  :  see  Exchange ;  Price ;  Money 
and  Currency;  Specializa- 
tion ;    Competition. 

Traders'  Surpluses  :   see  Surpluses. 

Transportation  :  related  to  rural  rent, 
199,  455 ;  to  residence  rents, 
201 ;   business  rents,  213. 


U 


Unearned  Increment :  520,  522,  527. 

United  States :  poverty  in,  523,  527  ; 
production  in,  525 ;  re- 
sources of,  525 

Unproductive  labor :  505. 

Unseen  Hand :  511. 

Utility:  Chap.  VII;  defined,  86; 
always  individual,  not  ag- 
gregate or  social,  97 ;  is 
desiredness,   86,    99 ;    habit 


and,  98  ;  calculation,  100  ; 
impulse,  custom,  and  habit, 
98 ;  related  to  price  offer, 
52,  85 ;  antagonism  with 
price,  480;  marginal,  see 
Price. 


Value :  defined,  24 ;  see  Price  ;  an 
exchange  ratio  between 
specific  goods  in  definite 
quantities,  236 ;  actually 
deduced  from  prices,  237, 
240  ;  not  quantitative,  239- 
243 ;  over  intervals  of  space, 
242  ;  of  time,  242  ;  in  cur- 
rent exchanges,  242 ;  Mar- 
ket, see  Price. 

Veblen,  T.  B. :    143,  403,  486. 

Viewpoint:  143,  517. 

W 

Wages :  defined  and  distinguished 
from  Profits,  66,  67  ;  stand- 
ard of  living  and,  2  ;  related 
to  land  shortage,  181,  452. 

Walker,  Francis,  258  n. 

Want :  see  Desires  ;   Price ;  Poverty. 

Waste:  308. 

Wealth:  defined,  132;  services  from, 
the  test,  129  ;  no  ethical 
test,  130  ;  in  United  States, 
519-521.   See  Capital. 

Webb,  Sidney  and  Alice,  269. 

Wieser,  Friedrich  v. :  449. 

Wilson,  Woodrow :  485. 

Work  :  see  Labor  ;  Wages. 


Young,  A.  A. :  386. 


Printed  in  the  United  States  of  America. 


'T^HE   following  pages  contain  advertisements  of 
books  by  the  same  author  or  on  kindred  subjects. 


Outlines    of    Economic    Theory 

By  HERBERT  JOSEPH  DAVENPORT 

Cloth,  8vo,  $  2.00 

This  was  not  primarily  intended  as  a  textbook,  yet  it  is  well 
adapted  to  the  pedagogical  need.  The  feature  which  first  attracts 
attention  is  the  short  list  of  "  suggestive  questions  "  which  open  and 
close  each  chapter,  serving  in  part  as  a  review  of  the  text,  and  in  part 
to  indicate  the  bearing  of  the  theoretical  discussions  upon  subjects  of 
current  and  practical  interest.  The  author  has  found  it  serviceable  in 
his  own  class-room  work,  and  it  can  hardly  fail  to  be  helpful  to  the 
independent  reader.  It  is  the  work  of  a  man  thoroughly  alive  to  the 
problems  and  difficulties  which  present  themselves  to  every  thinking 
man  of  business  and  familiar  with  the  solutions  which  have  been  offered 
from  time  to  time. 

The  book  is  in  two  parts,  of  which  the  first  sets  forth  the  theory 
of  economic  science,  but  following  the  usual  discussion  of  wealth,  value, 
production,  wages,  rent,  population,  capital  and  interest,  distribution, 
combinations  and  monopolies,  trades-unions,  taxation,  currency,  bi- 
metallism, international  trade  and  currency,  commercial  crisis,  the 
tariff,  etc.  ;  a  second  part  is  introduced  entitled  "  Economics  as  Art." 
Its  discussions  are  of  great  practical  value  and  are  timely,  touching  on 
the  competitive  system,  cooperation  and  profit-sharing,  state  and  mu- 
nicipal ownership,  taxation,  the  eight-hour  day,  the  apprentice  system, 
sweating  shops,  the  labor  of  women  and  children,  the  unemployed, 
the  currency,  free  coinage  of  silver,  etc.,  etc. 


"  Recent  events  in  the  political  world  have  stimulated  general  interest  in 
sociological  and  economic  science,  and  made  the  publication  of  such  works  as 
Mr.  Davenport's  extremely  timely. 

"  The  '  Outlines '  is  a  carefully  compiled  and  very  comprehensive  treatise, 
elemental  to  a  certain  degree,  but  not  to  such  an  extent  as  to  render  it  uninterest- 
ing to  the  average  reader.     His  method  is  well  adapted  to  pedagogical  needs." 

—  The  New  Orleans  Picayune, 


THE   MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


By  the  Same  Author 

Outlines  of  Elementary  Economics 

CiofA,  i2mo,  5  .80 

The  author  has  avoided  definitions  and  sub-classifications,  and,  in 
general,  everything  which  pertains  to  what  may  be  called  the  catalogue 
method  of  presentation.  Outside  of  the  work  which  the  questions 
require  of  the  student,  the  treatment  is  studiously  theoretical  rather 
than  descriptive. 


TABLE   OF  CONTENTS 

Chapter  I.  —  The  Scope  of  the  Science, 

Chapter  II.  —  Man  and  Environment. 

Chapter  III.— Utility  and  Wealth. 

Chapter  IV. —  The  Factors  in  Production. 

Chapter  V.  — Value. 

Chapter  VI.  — Cost  of  Production. 

Chapter  VII.  — Rent  of  Land. 

Chapter  VIII.  —  Interest. 

Chapter  IX. — Wages  and  Distribution. 

Chapter  X.  —  Population,  Increasing  and  Diminishing  Returns. 

Chapter  XI.  —  Money. 

Chapter  XII.  — The  Competitive  System. 

Chapter  XIII.  — Population,  Rent  and  Socialism. 

Chapter  XIV.  —  Some  Current  Questions  in  Economics. 

Chapter  XV. —  Taxation. 

Chapter  XVI.  — Consumption,  Standards  of  Life  and  Fashion. 

Chapter  XVII.  —  Conclusion. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


The  Purchasing  Power  of 
Money 

A  STUDY  OF  THE  CAUSES  DETERMINING  THE 
GENERAL  LEVEL  OF  PRICES 


AN   EXPLANATION   OF  THE    RISE   IN   THE   COST   OF   LIVING 
BETWEEN    1896   AND    1910 

By    IRVING    FISHER 

Yale  University 

Author  of  "  The  Rate  of  Interest,"  "  The  Nature  of  Capital  and  Income," 
"A  Brief  Introduction  to  the  Infinitesimal  Calculus,"  etc. 

Cloth,  8vo,  505  pages,  $3.00  by  mail,  $3.18 


In  this  important  work  are  discriminated  for  the  first  time  the  five  groups 
of  magnitudes  upon  which  alone  the  purchasing  power  of  money  depend* 

The  amount  of  money  in  circulation  is  more  accurately  determined  than 
ever  before  ;  the  figures  for  the  amount  of  bank  deposits  subject  to  check  are 
entirely  new.  By  an  original  method  of  ascertaining  the  velocity  of  circula' 
tion  of  money  (explained  in  the  Journal  of  the  Royal  Statistical  Society  for 
December,  1909)  Professor  Fisher  has  arrived  for  the  first  time  at  a  reason- 
ably exact  estimate  for  that  hitherto  unknown  element ;  his  figures  showing 
the  velocity  of  bank  deposits  are  the  first  of  this  kind  ever  published  in  the 
United  States.  The  figures  for  the  volume  of  trade  are  constructed  by  the 
method  of  Professor  Kemmerer,  applied  with  added  elements  and  more  detail 
and  labor  in  the  computation. 

From  the  theoretical  point  of  view  the  book  is  conservative,  a  confirmation 
of  the  older  theories.  From  the  practical  point  of  view  it  touches  a  live  sub- 
ject, and  will  be  found  exceedingly  interesting  and  incomparably  valuable  by 
all  students  who  are  interested  in  the  present  rise  of  the  cost  of  living. 


PUBLISHED  BY 

THE  MACMILLAN  COMPANY 

Sixty-four   and  Sixty-six  Fifth  Avenue,  New  York 


The  Nature  of  Capital  and  Income 

By   IRVING   FISHER 


Cloth,  ^7  pages,  Svo,  $j.oo  by  mail  $j^o 


This  work  treats  of  the  fundamental  concepts  of  wealth,  prop- 
erty, services,  capital,  income,  interest,  etc.,  and  shows  the  rela- 
tions subsisting  between  them  and  how  these  relations  are 
unconsciously  observed  in  practical  bookkeeping.  The  book 
therefore  links  together  the  principles  of  economics  with  the 
usages  of  practical  business,  and  makes  it  the  best  possible 
treatise  to  put  into  the  hands  of  students. 

The  author's  concept  of  income,  as  services  rendered  by 
capital,  corresponds  to  practical  accounting :  when  all  possible 
income  accounts  are  added  together,  the  result  will  be  the  total 
enjoyed  income  of  the  community.  The  value  of  capital  is  al- 
ways the  discounted  value  of  its  expected  income.  The  conse- 
quences of  this  in  practical  bookkeeping  are  traced,  and  the 
significance  of  savings,  depreciation,  sinking  funds,  etc.,  is  ex- 
plained. 

"It  is  safe  to  say  that  as  a  profound  study  of  the  fundamental 
concepts  of  economic  science  the  present  volume  will  rank 
above  anything  that  this  country  has  produced  in  recent  years, 
and  will  stand  on  a  par  with  the  most  notable  contributions  of 
European  scientists."  —  Fred.  R.  Fairchild,  in  Yak  Alumni 
Weekly. 


THE    MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


The  Rate  of  Interest 


Its  Nature,  Determination  and  Relation  to  Economic 
Phenomena 

By  IRVING  FISHER 

Cloth,  442  pages,  index,  8vo,  $3.00 

Professor  Fisher  remarks  in  his  Preface  that  while  the  value  of  the  work 
accomplished  by  Rae,  B5hm-Bawerk,  Landry,  and  some  other  predecessors  in 
this  line  of  investigation  has  been  great,  it  is  chiefly  negative.  The  principal 
result  has  been  to  make  it  plain  that  the  rate  of  interest  is  a  phenomenon  om- 
nipresent in  economic  relations.     The  author  continues : 

"  The  theory  of  interest  here  presented  is  largely  based  upon  the  theories 
of  the  three  writers  above  mentioned,  and  may  therefore  be  called,  in  defer- 
ence to  Bohm-Bawerk,  an  '  agio  theory.'  But  it  differs  from  former  versions 
of  that  theory  by  the  introduction  explicitly  of  an  income  concept.  This  con- 
cept, which  I  have  developed  at  length  in  'The  Nature  of  Capital  and 
Income,'  is  found  to  play  a  central  role  in  the  theory  of  interest.  The  diffi- 
cult problem  is  not  whether  the  rate  of  interest  is  an  agio,  or  premium,  for  of 
this  there  can  be  no  question,  but  upon  what  does  that  agio  depend  and  in 
what  manner?  Does  it  depend,  for  instance,  on  the  volume  of  money,  the 
amount  of  capital,  the  productivity  of  capital,  the  'superior  productivity  of 
roundabout  processes,'  the  labor  of  the  capitalist,  the  helplessness  of  the 
laborer,  or  upon  some  other  condition?  The  solution  here  offered  is  that  the 
rate  of  interest  depends  on  the  character  of  the  income-stream,  —  its  size, 
composition,  probability,  and  above  all,  its  distribution  in  time.  It  might  be 
called  a  theory  of  prospective  provision  of  income." 

The  contents  are  summarized  under  four  heads : 

I.  Criticism  of  Previous  Theories 
II.   First  Approximation 

III.  Second  and  Third  Approximations 

IV.  Conclusions.    Appendices.    Index. 

"  Dealing  with  fundamental  concepts  of  wealth,  capital  and  income,  Pro- 
fessor Fisher  has  corrected  and  deepened  our  knowledge  of  the  most  familiar 
facts  contributorially  to  important  conclusions  of  a  general  nature."  —  Prof. 
Franklin  H.  Giddings. 

THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


Business  Organization  and  Combination 

An  analysis  of  the  erolution  and  nature  of  business  organization  in  the 
United  States  and  a  tentative  solution  of  the  corporation  and  trust  problems 

By    lewis    H.    HANEY,    Ph.D. 

Profbssor  of  Economics  in  the  University  of  Texas 

Author  of  "  A  Congressional  History  of  Railways  " 

AND  "  History  of  Economic  Thought" 

Cloth,  Crown  8vo,  48 j  pages,  $  2,00 


EXTRACTS   FROM   THE   PREFACE 

This  book  deals  with  the  organization  of  business  enterprises,  chiefly  in  the  United 
States. 

While  the  author  has  designed  the  book  for  use  in  American  colleges  and  universities,  he 
has  kept  in  mind  the  interests  of  the  business  man  and  of  the  general  reader.  It  is  hoped 
that  the  book  will  be  of  service  to  that  large  class  of  thoughtful  business  men  who  desire  a 
comprehensive  knowledge  of  the  economic  and  legal  aspects  of  the  organizations  with  which 
they  are  associated.  .     . 

Numerous  concrete  illustrations  of  business  organizations  are  given.  Indeed,  the  author 
believes  that  in  no  similar  work  will  so  large  a  mass  of  up-to-date  illustrative  data  be  found. 
It  is  believed  that  the  reader  may  secure  from  the  following  pages  a  good  general  knowledge 
of  the  legal  principles  which  concern  the  various  forms  of  business  organization  and  combi- 
nation.    On  several  important  points  the  leading  cases  are  cited.     .     .     . 

Especial  study  has  been  given  to  the  problem  of  making  the  corporation  a  more  desirable 
citizen  than  it  now  is.  In  connection  with  that  problem,  the  reader's  attention  is  invited  to 
the  suggestion  that  a  new  form  of  organization  is  needed  in  the  United  Seates,  —  a  limited- 
liability  association  which  will  occupy  the  gap  between  the  partnership  and  the  corporation. 

The  "  trust,"  or  monopolistic  combination,  is  a  form  of  business  organization,  and  the 
trust  movement  is  a  movement  in  the  world  of  business  organization;  and,  accordingly,  the 
student  of  the  trust  problem  will  find  a  concise  and  definite  analysis  of  the  evils  of  combina- 
tion, followed  by  suggestions  for  specific  remedies.  Perhaps  the  author  has  gone  too  far  in 
making  detailed  suggestions;  but  he  has  done  so  in  the  hope  of  making  general  principles 
more  definite  and  concrete  than  they  usually  arc. 

The  general  scheme  of  the  work  is  as  follows :  First  comes  a  series  of  chapters  describ- 
ing and  analyzing  the  various  forms  of  business  organization  in  such  a  way  as  to  bring  out 
the  centuries-long  evolution  which  has  molded  them.  Then,  the  corporate  form,  being  clearly 
dominant,  the  life  history  of  a  corporation  is  set  forth  in  a  series  of  chapters  which  describe  in 
some  detail  the  mam  events  ;  promotion,  underwriting,  reorganization,  and  the  like.  Finally, 
great  evils  having  appeared  in  corporate  organization,  the  question  of  public  policy  is  raised, 
and  an  attempt  at  a  comprehensive  and  scientific  solution  of  that  question  is  made. 


THE    MACMILLAN    COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


American    Railroad    Economics : 

A  Textbook  for  Investors  and  Students 
By   a.    M.    SAKOLSKI,    Ph.D. 

LECTURER  IN  NEW  YORK  UNIVERSITY,  SCHOOL  OF  COMMERCE, 
FINANCE  AND  ACCOUNTS 

CloiA,  i2fno,  $  /.2j 

The  railroads  are  studied  as  business  enterprises. 
Their  operations  and  activities  are  analyzed  and  in- 
terpreted from  an  economic  and  financial  viewpoint, 
and  on  the  basis  of  actual  conditions.  The  book, 
therefore,  contains  the  latest  legal,  statistical,  and 
accounting  data  relating  to  American  railroads. 

Among  the  topics  discussed  are  : 

(i)  Rates  and  Rate  Regulation. 

(2)  Railroad  Securities. 

(3)  Railroad  System  Expansion  and  Unification. 

(4)  The  Physical  Factors  in  Economic  Operation. 

(5)  Traffic  Statistics  and  Standards  for  Gauging  Oper- 
ating Economy  and  Efficiency. 

(6)  Accounting  Problems  and  the  Analysis  of  Financial 
Statements,  and 

(7)  Capitalization  and  Capital  Investment. 


THE    MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 
This  book  is  DUE  on  tlie  last  date  stamped  below 


MAY  3    1963' 


tie 


m-i^  ^^*^ 


MAY  1 3  1983 


O-MW 


JUL' 


m  teB4 


-%i\^^ 


t 
4 


Form  L-9 
20m-l,'41(1122) 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  168132    7 


UNIVERSITY  of  CALIFORNIA 

LOS  A..GELES 
LIBRARY 


